Implications of the new leasing standard for the aviation sector
How will IFRS 16 Leases affect aviation companies?
The International Accounting Standards Board (IASB) has published IFRS 16 Leases. This articles explains how this new standard will affect aviation companies.
What is IFRS 16 Leases?
IFRS 16 sets out a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. One of the most notable aspects of IFRS 16 is that the lessee and lessor accounting models are asymmetrical.
For lessees, IFRS 16 introduces a single accounting treatment, recognition of a right-of-use asset and a lease liability.
For lessors the current finance and operating lease distinction and accounting remains largely unchanged.
IFRS 16 will replace IAS 17 for reporting periods beginning on or after 1 January 2019.
IFRS industry insights
The enclosed publication highlights issues from the new leasing standard that will be of interest to the aviation industry.
- For lessees with operating leases, an ‘aircraft’ (right-of-use) asset will come on the balance sheet together with a lease liability.
- Significant KPIs including ROCE will be affected – for some it will increase, for others decrease.
- For foreign currency leases there will be increased profit and loss volatility as the lease liability is retranslated.
- For a ‘wet’ lease only payments for the aircraft need to be recognised, the service element may be separated with the accounting unchanged.
- The changes for an entity and the comparison with peers will need to be explained to stakeholders.