The new rules for lease accounting will make a significant mark on the corporate world. In 2019 organisations which report under FASB or IFRS will have to show virtually all their leasing contracts in their balance sheets. Sounds logical? Currently, only 15 per cent of the 3,000 billion Euros of leasing currently appear on balance sheets worldwide, so the new rules will certainly have a significant impact. Publishing a balance sheet, and supervision by an accountant, has in fact not always been the norm.
FAQ - How new lease accounting standards will impact your business
Five frequently asked questions about lease accounting and our answers to them.
Let’s go back to 1850 and we find an almost provincial Rotterdam. The city is static, while Amsterdam, Antwerp and even Vlissingen (Flushing) are busy becoming the port epicentres of Western Europe. Finally Rotterdam catches up with all its competitors, and entrepreneur Lodewijk Pincoffs plays a major role in this. Over a period of thirty years he works his way up to the highest echelons in Rotterdam. Pincoffs plays a prominent role in the city council, holds a seat in the Upper Chamber and has affluent friends.
Under his persuasion, nine million guilders is allocated to the port. A new waterway and a railway line are constructed to improve Rotterdam’s accessibility. There seems to be no holding Rotterdam back. But this then changed when people scented danger at the end of the seventies. Pincoffs appears to have been fiddling the books; he has been listing debts as profits. In 1879 he flees to New York. Today a bust and a small bridge at the city’s Poortgebouw are the only reminders of this once-revered businessman.
Pincoffs left the city and its investors penniless. It’s hardly a coincidence that the profession of accountancy was born in this period. And even more devastatingly: the waterways, in which a huge amount of money had been invested, silted up. Thanks to dredgers – which made the route navigable once more – and the municipality, Rotterdam did finally make the progress which eventually led to it becoming one of the world’s largest port cities today.
Back to the present. Many organisations now use off-balance leasing contracts, including for major liabilities such as renting an office building. The premises and the rental liability are, however, not shown on the balance sheet, so that ratios appear to be more favourable. This will change with the new rules in 2019, but large organisations will already need to introduce these drastic changes now. Accounting firm PWC has calculated what the introduction of the new rules means right now. In the retail sector, debt on the balance sheet would double; for instance, solvency would drop from 41 to 27 per cent, and the debt ratio would rise from 1.1 to 2.5 times the operating result.
A threat? In fact I would regard it as an opportunity, certainly for property managers. It will become more relevant to consider your real estate critically and to apply alternative concepts, for example by reducing the quantity of property and by enhancing its flexibility. The new rules are also a driver for getting systems in order; the rental contracts and the liabilities they entail will shortly become immediately visible in the balance sheet.
And it is precisely this transparency which is the positive note of the legacy Lodewijk Pincoffs left behind in 1879 in Rotterdam.