Shipping Ponders Changes to Accounting Treatment of Leased Assets and Liabilities

International accountant and shipping consultant Moore Stephens reminds shipping industry that it has until July 17 this year to respond to an International Accounting Standards Board (IASB) discussion paper on the accounting treatment of leases.

Richard Greiner, a partner with the Moore Stephens shipping group, says, “Although it is likely to be at least two years before any new standard comes into effect, the big decisions on what will constitute that standard will be made now. For that reason, it is important that shipping makes its voice heard before the discussion paper deadline, and it is encouraging to see that the Chamber of Shipping, as the trade association for the UK shipping industry, has canvassed its members about the possibility of making a submission to the IASB.”

The discussion paper, which deals primarily with leases from the perspective of the lessee, has been prompted by the IASB view that operating leases, using the existing definition, give rise to assets and liabilities which are not currently reflected in financial statements. The IASB also says that the differences between operating and finance leases are often quite small, yet the accounting treatment adopted for each is fundamentally different. It also notes that, as a result, it may be possible to structure a lease so that the underlying financing obligations are not recorded as a liability on the balance sheet.

The IASB has tentatively agreed that the scope of any future standard should be changed. Its basic premise is that any lease should give rise to the recognition of an asset and a liability on the lessee. The asset represents the right of the lessee to use the leased item, and the liability represents the obligation to pay future rentals under the lease.

Richard Greiner says, “The most significant change in the proposals is the removal of the distinction between finance leases and operating leases. It is important to note that the IASB proposals may refer to leases, but the definition of a lease also includes bareboat charters and time charters. The proposals would mean that all chartered-in tonnage would appear in a company’s balance sheet, together with a liability for the obligations under the lease. This could have a major impact on gearing, and then of course on any financial covenants linked to gearing.

“A discussion paper is a long way from a revised standard, but is nonetheless a good indicator of future developments. The impact of the proposals on individual entities will very much depend on the nature of their operations, but it is important that the shipping industry moves quickly if it wants its contribution to this important debate to be heard.”