No, this is not a bad joke. What does a wine barrel, weather station, telecoms tower, and aeroplane all have in common? In the world of lease accounting, all of these things can report under IFRS 16.
Apologies, accountants, as the next time you treat yourself to a bottle of Central Otago Red, you may be reminded of the complexity of the lease agreement which helped produce that bottle.
Many barrels are leased, and you bet the lease tenure is affected by the wine time. The average entry-level wine ages for 3 to 5 years, passing the requirement of lease length for IFRS 16 – so as that pinot is appreciating, that barrel is depreciating!
Leased land, lease equipment – there can be a lot of IFRS 16 behind a weather report! These leases involve long leases and expensive equipment – they will need to be brought onto the balance sheet.
Lease accounting doesn’t need to be dark and stormy with Nomos One.
These are long leases, but also, as technology continues to grow, there is an increasing demand for telecoms towers, especially now with the introduction of 5G – meaning there’s more for our accountants to include in their reporting.
This is an interesting political space as China moves to expand its 5G network across the world. This infrastructure is costly – and some will likely be financed using leasing.
You can read more about it here:
5G Focus: Ericsson in China; launches in NZ, Philippines; US Cellular rollouts
Chinese media reports ‘softening’ of Huawei 5G ban in NZ
China’s 600,000 5G stations
In the 1980’s aircraft operating leases represented less than 5% of the overall aircraft operating market – that number has now grown to over 40% and is expected to increase.
This industry rise in operating leases could be partly explained by offering a form of off balance sheet financing for airlines under the old reporting standard. With the release of IFRS 16, these fleets of operating leases had to be brought onto the balance sheet as right of use assets.
The aviation industry has had a very tough 18 months as they navigate through COVID, with air travel being down 60%. Unfortunately – the typical lease term for new aircraft is 8-12 years meaning much of this cost is locked in for the foreseeable future.
Let’s hope the worst of this pandemic is behind us, and we can all get back to international travel soon!
Have you ever thought about leasing that software that you’re developing?
While this sounds weird, financing comes in all shapes and sizes, including lease arrangements. This involves paying off your software contractors via instalments – and while intangibles are a bit of a fringe case under IFRS 16, they can still meet the leasing reporting requirements.
What do they all have in common?
In lease accounting, all the above are classed as assets and liabilities.
IFRS 16 reporting requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months unless the underlying asset is of low value. You can read more on the standard here.
Although IFRS 16 is dominated by property and vehicle leases, a whole range of leases is required to report on under IFRS 16. These are just a few weird and wonderful types of lease assets our customers report on with our software.
Our software allows customisable fields, automatic workflows and dashboards to enable effortless reporting. Schedule a demo today to find out how we can help you with your lease accounting requirements.