Leasing  About the new lease accounting standards

Enterprises listed both domestic and foreign markets and enterprises listed abroad and preparing financial statements using IFRS or ASBE shall be implemented as of January 1, 2019; Other enterprises that implement the ASBE shall be implemented as of January 1, 2021.

The core change of the new lease standard is to cancel the classification of leasing transactions at the lessee in financial lease and operating lease, and require the lessee to recognize the right to use assets and lease liabilities for all leases (except short-term lease and low-value asset lease with simplified treatment), and recognize depreciation and interest expenses respectively. In terms of the lessor, it basically follows the accounting treatment provisions of the original leasing standards, but improves the lessor's information disclosure, requiring the lessor to disclose the risk management strategy adopted for its reserved rights related to the leased assets and the measures taken to reduce the relevant risks.

The new leasing standards converge with international financial reporting standard 16 - leasing (IFRS 16). However, IFRS 16 requires that if the lessee uses the fair value model in IFRS 40 to measure investment real estate, the right to use assets that meet the definition of investment real estate in IFRS 40 should also be measured using the fair value model.

Accounting treatment of new lease standards

I. Accounting treatment of lessee

1. Initial measurement

Dr: Right of use assets (present value of unpaid lease payments, etc.)

Lease liabilities - unrecognized financing expenses (debit and credit balance)

Cr: Lease liabilities - lease payments (unpaid lease payments)

Prepayments (lease payments paid before the beginning of the lease term, deducting the lease incentives taken)

Bank deposits (initial direct expenses)

Estimated liabilities (the present value of the estimated costs of dismantling and removing the leased assets, restoring the site where the leased assets are located or restoring the leased assets to the state agreed in the lease agreement)

2. Subsequent measurement

(1) Recognition of interest on lease liabilities：

Dr: Financial expenses - interest expenses / construction in progress, etc

Cr: Lease liabilities - unrecognized financing expenses (increase the carrying amount of lease liabilities)

(2) Payment of lease payments：

Dr: Lease liabilities - lease payments (reduce the book amount of lease liabilities)

Cr: Bank deposits, etc

When the lease payment changes due to revaluation or lease change, the book value of the lease liability shall be remeasured.

II. Accounting treatment at the lessor

Finance lease

1. Initial measurement

Dr: Finance lease receivables - lease receipts (lease receipts not yet received)

Unguaranteed residual value (unguaranteed residual value at the end of the expected lease term)

Bank deposits (lease payments received)

Cr: Financial leasing assets (book value)

Gain or loss on disposal of assets (fair value - book value) (may be debit or credit)

Bank deposits (initial direct expenses)

Finance lease receivables - unrealized financing income

2. Subsequent measurement

Dr: Bank deposits

Cr: Finance lease receivables - lease receipts

Dr: Finance lease receivables - unrealized financing income

Cr: Rental income / other business income

Operating lease: 

Dr: Accounts receivable / bank deposits

Cr: Rental income / other business income (rent per period)

The main impact of the revision of the new leasing standards on Enterprises

I. Impact on the lessee's financial statements

For the assets and liabilities related to the operating lease business, the original standards provide that the asset and liability are not recognised in the balance sheet, so that they are off-balance sheet financings. If the new leasing standards are implemented, the assets and liabilities in the enterprise's balance sheet will increase, resulting in an increase in the asset liability ratio. Secondly, for the cash flow statement, the relevant data such as cash flow from operating activities will also change. The new standards have little impact on the income statement. There will be low profits in the early stage, but it will gradually increase in the later stage.

II. Impact on enterprise decision-making

Before the implementation of the new leasing standards, the accounting entity could influence the balance sheet structure by deciding whether financing through leasing or other forms of financing. After the implementation of the new leasing standards, the presentation and disclosure requirements of enterprises for leased assets will affect the business decision of "buy or rent" of enterprises. The lessor's strategy also needs to be adjusted according to market changes.

III. Impact on income tax treatment

Before that, there were differences between the accounting treatment and the income tax treatment of finance leases. The new standards unify the accounting treatment of leasing. The above differences will exist in all leasing businesses, which will inevitably affect deferred income tax assets and liabilities, and increase the difficulty of tax treatment of enterprises.

Transition of new and original leasing standards

Compared with the original standards, the new standards have great changes. In order to make the enterprise transition smoothly, the new standards provide a variety of transition options. Generally speaking, it can be divided into full retroactive method and simplified retroactive method.

If the enterprise adopts the full retroactive method, the operating lease contracts that are still being executed on January 1, 2020 shall be deemed to have been accounted for in accordance with the new standards since the lease start date. The opening balance of the financial report in the reporting period and the financial report in the comparable period need to be adjusted at the same time.

If an enterprise adopts the simplified retroactive method, it can only adjust the opening data of the financial report of the year in which the new standards are first implemented according to the cumulative impact, but not the information of the comparable period.

Even if the enterprise chooses the simplified method, it also needs to calculate and adjust the financial data of 2021 in combination with the lease term, rent payment interval, rent of each period, reasonable discount rate and the treatment of relevant assets after the lease expires. For new leasing business, it is also necessary to calculate and determine the book value of relevant assets and liabilities and the financial expenses in subsequent periods. This calculation process is relatively complex. Our professional team has helped many of our customers complete this connection. If you need our help, please contact us.

Authors: Yolanda You (CICPA/Senior Auditor), Claudia Wulff (Auditor/Tax Consultant), Translation: Enrico Cordes (Research Assistant)