While the new standard does not change the overall cash flows, it does change the financial and operational ratios, and volatility in earnings.
As Ind AS 116, the new accounting standard for leases, came into force from April 1, 2019, investors and analysts struggle to understand the impact of this standard on a wide range of sectors, according to an analysis done by a group of CFOs.
"The theory is simple to understand, but complex to fathom when they (investors) look at the quantum of impact on the financials," an analysis by the CFO Board noted with regard to the retail industry.
"For many companies, the choice of transition method, and which practical expedients to apply will have a major impact on the cost of implementing the standard, and the comparability of trend data in the years after transition," read the note.
Since the application of Ind AS 116 offers ample scope for interpretation at the company level, hence, clarifications from the Ministry of Corporate Affairs and from the direct and indirect departments are in order.
In December 2019, the CFO Board, a non-profit body of senior finance leaders, came out with a white paper on the key issues pertaining to Ind AS 116 relevant for CFOs in the industry as well as policymakers and regulators.
Ind AS 116, in line with the globally accepted IFRS 16, brings in all leases on-balance sheet for lessees. It brings parity for financial and operational leases in terms of accounting. The standard, however, has a weaker impact on lessors.
It affects all businesses which require leases. That could be aircraft in airlines, stores in the retail sector, towers in telecom etc. While the new standard does not change the overall cash flows, it does change the financial and operational ratios, and volatility in earnings.
These cascade into new key financial and valuation metrics. "The legacy accepted level of metrics will have to be redefined or undergo a complete overhaul." Further, the standard medians used by rating agencies etc. may also have to change.
The application of Ind AS 119 has an impact beyond financial reporting, and would prompt the re-evaluation of 'lease versus buy' decisions, among other things. Moreover, on the business front, many contracts have had an element of leasing embedded in them. For instance, outsourcing, contract manufacture, solar energy contracts.
According to the CFO Board's analysis, "the standard introduces new estimates and judgmental thresholds that affect the identification, classification and measurement of lease transactions."
The presentation of leased assets is another issue where the guidance provided by Ind AS 116 may not be definitive. Supplementary clarification by the Ministry of Corporate Affairs (MCA) may help matters, they said.
Ambiguity in the tax treatment of leases under direct taxes due to the lack of ICDS guidance also needs to be dispelled. Likewise, it is not entirely certain how the leasing transactions may be viewed under the GST regime.The writer is a contributing author with Moneycontrol.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.