New Zealand companies appear blissfully unaware of impending changes to the way leases are handled on balance sheets - one of the most impactful global accounting changes in the last decade.
A recent study of 2,800 businesses globally by Grant Thornton International showed that only 24% of New Zealand companies surveyed were aware of the impending changes, ranking us fourth last of 39 countries, with only Mainland China (5%), Denmark (8%) and Turkey (13.5%) showing less awareness. The global average was only 45% which given the significance of leasing to many organisations, both large and small is much lower than Grant Thornton had expected.
The survey also identified the average number of leases in various industries around the world; technology companies lead the pack with an average of 34, followed by financial services companies that had 30, retail followed with 23 and manufacturing had 17.
Mark Hucklesby, National Technical Director for Grant Thornton New Zealand, said that there is no question that the global review of current lease accounting is long overdue. “The new changes will get rid of the anomaly where lease arrangements (finance lease and operating lease) are currently accounted for quite differently.
“At present, if one has a finance lease, the right to use the leased asset and the financial obligations associated with its use both appear on the balance sheet. If you have an operating lease, which is any lease arrangement that is not a finance lease, then you do not have to record anything on your balance sheet, all you need do is record your lease payments in your income statement.
“This lack of consistency with regard to leases has festered for years finally coming to a head following the Global Financial Crisis when the Finance Ministers from the G20 told accounting standard setters to fix the lack of comparability. The politicians and their advisers correctly observed that when there is a need to acquire an asset, it should make no difference to whether an organisation chooses to finance them from bank borrowings or from leasing contracts”.
“The current balance sheet does not present a complete and transparent financial picture. Basic analytical tools like ‘return on investment’ and ‘debt-to-equity ratios’ are useless when neither the leased assets nor the financial liability associated with the lease contracts are on the books. Before conducting even elementary financial statement reviews, users must look to the notes, and then make their own adjustments to published accounts based on what is, in many ways, incomplete information,” he said. When finally introduced, the new accounting standard is likely to result in many New Zealand companies involved in leasing arrangements reporting substantial increases in both their assets and liabilities, with further ramifications for banking ratios and the like.
“The good thing is that New Zealand companies will still have time to learn about the proposed changes. The release of the first Exposure Draft generated more than 700 submissions, so many that the second Exposure Draft is expected out later this year.
“These proposed changes are far-reaching and will affect a wide range of companies. Owners would be well advised to acquaint themselves with them now, and if they disagree with what is being proposed, there is still time to come forward,” he said.
The US Securities and Exchange Commission has estimated the undiscounted value of future lease payments among US listed companies alone at more than US$1.25 trillion - an amount that is greater than the gross domestic product of many countries. Globally, the figure is far higher.