HM Revenue and Customs (HMRC) has pointed out that the new accounting standard – International Financial Reporting Standards (IFRS) 16 Leases – issued by the International Accounting Standards Board (IASB) in January this year, will necessitate changes to the existing tax rules for the leasing of plant or machinery in the United Kingdom.
On August 9, HMRC issued a discussion document that sets out possible options for a tax response to the lease accounting changes. HMRC is seeking views from all interested stakeholders on the required tax changes by October 30, 2016.
IFRS 16 will require companies to report on their balance sheets all of their lease commitments as assets and liabilities. The IASB has noted that over 85 percent of those commitments are presently categorized as "operating leases," which are disclosed only in the notes to financial statements.
The remaining "finance leases" (where the lease transfers substantially all the risks and rewards incidental to ownership of the asset to the lessee) are currently reported on company balance sheets.
For lessees adopting the new standard, HMRC noted that the current link between accounting and tax treatment will be broken and changes will need to be made to the tax legislation. Those changes could simply preserve the effects of the current regime or could introduce a new tax treatment regime.
The discussion document therefore covers the current accounting for leasing and tax, and the new lease accounting and its tax impacts. Other factors that need to be taken into account are said to include simplification, wherever possible, and the protection of revenue for the Government.
IFRS 16 will be effective from January 1, 2019. Early application is permitted for companies that also apply the recently issued IFRS 15 Revenue from Contracts with Customers.
HMRC emphasized that UK businesses accounting under UK Generally Accepted Accounting Practice (UK GAAP) will not be affected unless UK GAAP changes its lease accounting to fall in line with IFRS 16. It confirmed that there is no firm information presently whether this will happen, and that it would be in 2022 at the earliest.
It has been estimated that almost half of listed companies using IFRS or US GAAP will be affected by the lease accounting changes, and some industry sectors will be more affected than others.
For example, airlines, retailers, and travel/leisure services providers are expected to be most affected, as future payments of off-balance-sheet leases in these industry sectors equate to almost 30 percent of the total assets (on average). For some airlines, the value of their off-balance-sheet leases is equivalent to more than 100 percent of the value of the airline's total assets.
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