ESBG believes that EFRAG’s draft endorsement advice should include a suggestion that the European Commission reviews the wording in CRR/CRD IV sufficiently in advance before IFRS 16 is in place.
ESBG will incur significant one-off and on-going costs in complying with the new standard, bearing in mind that no difference is expected in terms of total impact on equity of lease contracts under IFRS 16 compared to existing IAS 17, except for timing recognition. This accounting change should not lead to a reassessment of an entity’s overall risk profile, and in particular no negative prudential impact should arise from adopting IFRS 16. As it stands right now, it is uncertain whether the EBA’s conclusion that the estimated impact on own funds and leverage ratios will be of limited significance for the vast majority of European banks will occur or not.
Potential effects of stakeholders’ behaviours:
ESBG agrees with EFRAG’s assessment.
Potential impact of IFRS 16 on the leasing industry:
ESBG overall agrees with EFRAG that the new standard does not represent a threat to the overall viability of the leasing industry, however there are certain issues which cannot be ignored:
- The requirement in IFRS 16 by which, if a contract is, or contains, a lease, an entity is required to account for each lease component within the contract as a lease separately from non-lease components (i.e. services) of the contract, entails a significant business risk for lessors. It should be borne in mind that lessees may decide to use the practical expedient which allows them to elect not to separate non-lease from lease components, while lessors will have to develop their systems in order to provide their customers with all the information on these components.
Costs and benefits:
Most of ESBG members are not in a position to deliver at this stage concrete estimates for the amounts of the costs.
However ESBG members expect additional costs for the development and implementation of a modified client-/credit rating model for clients applying IFRS. For already-existing contracts with clients applying IFRS there will be additional costs for adapting covenants in their loan contracts to the new situation caused by IFRS 16. In other words, acting as a lessee, the main one-off costs are expected to relate to the analysis of existing contracts, the purchase of additional IT systems, and potential process changes.
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