Implications of the new leasing standard for the power and utilities sector

How will IFRS 16 Leases affect power and utility companies?

The International Accounting Standards Board (IASB) has published IFRS 16 Leases. This articles explains how this new standard will affect power and utility 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 those in the power and utilities sector.

  • The distinction between operating and finance leases will no longer apply for lessees, and a right-of-use asset will be recognised on balance sheet together with a lease liability for all but the most insignificant lease arrangements.
  • Changes to the definition of a lease means arrangements previously outside the scope of lease accounting may now be captured, while others currently in scope may not meet the revised definition.
  • EBITDA will generally increase as an operating lease expense is replaced by depreciation and interest, but gearing will also increase, impacting entities’ capacity to take on additional debt.
  • For lessors, the requirements remain largely unchanged, however as a result of the changes impacting lessees, lessors may see a change in the length and terms of arrangements lessees are willing to enter into.

Practical examples for power and utilities companies

Examples Customer rights Supplier rights Other factors Conclusion under IFRS 16
1 - Solar farm Contract to purchase all output over 20 year life of plant.
Design of plant specified by customer.
Responsible for building and operating plant and operating and maintaining to customer specifications. Supplier will receive tax credits for the construction. Contract contains a lease as the customer has the right to direct how and for what purpose the asset is used, as predetermined by the design of the plant.
2 - Solar farm Purchases all output. Schedule of output is pre-determined.
Customer has no right of access to the plant or decision making rights.
Owns and operates the plant, cannot substitute the plant.
Supplier designed and built the plant with no involvement of the customer.
  Contract does not contain a lease since customer rights do not extend beyond those of a customer in a typical supply or service contract.
3 - Solar farm Purchases all power over a particular period.
Customer issues instructions on operating the plant and controls quantity and timing of delivery.
Supplier operates and maintains the plant.   Contract contains a lease as customer is making the decisions about how and for what purpose the asset is being used.
4 - Fibre optic cable Right to use three physically distinct fibres within a fibre optic cable.
Customer makes decision about use.
Supplier responsible for repairs and maintenance. Can only substitute for reasons of repair, maintenance or malfunction.   Customer has right of control and contract contains a lease.
5 - Fibre optic cable Right to use specified amount of capacity within fibre optic cable (cable contains 15 fibres with similar capacities). Supplier determines which fibres are used.   Contract does not contain a lease as the capacity portion is not physically distinct, and hence customer does not control it.

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