Updating an audience in Singapore on IASB’s work programme, IASB chairman Hans Hoogervorst said the standards setter had conducted an effect analysis of its proposed leases standard among 12,000 listed companies in Europe, Asia and North America.

Of the total, just 1,000 companies, or less than 10%, accounted for 80% of all the operating leases. Roughly 50% of companies will not be affected at all since they currently do not have material operating leases, according to IASB’s analysis.

Hoogervorst said that for these so-called ‘heavy’ users, operating leases are a very significant source of finance.  IASB has calculated that inclusion of the lease liability would lead to an increase of the long-term debt-to-equity ratio from 13 percentage points in Europe through 20 percentage points in Asia.

IASB’s study identified considerable variation in the way leases are used within economic sectors, with transportation, telecommunication and retail companies making substantial use of the leveraging offered by leases.

However, the research also showed variations within an individual sector.  As an example, some airlines have operating leases for almost all their airplanes, which Hoogervorst said suggests their ‘hidden leverage’ will be much higher than IASB’s general estimate. However, he pointed to other airlines which already carry most of their fleet on the balance sheet and will not be impacted by the new standard.

‘In all, there can be no doubt that the leases standard will greatly enhance comparability between and within economic sectors. In those economic sectors that are significantly affected by the leases standard, it brings much needed insight in the true leverage of companies,’ Hoogervorst said.

Hoogervorst acknowledged that those companies significantly affected by the lease standards could face additional costs in moving to a new accounting approach, and said IASB was actively looking for ways to make the standard less costly to implement and apply.

‘We have already made some pragmatic decisions to keep costs to a minimum, such as the exclusion of short-term leases and variable lease payments. Last month, we also decided to include guidance on how to use a portfolio approach for leases,’ Hoogervorst said.

Hoogervorst also said that while IASB has reached agreement with the US Financial Accounting Standards Board (FASB) that most leases need to be put on the balance sheet, the issue of how the lease liability should be run off in the income statement was still under discussion. While more work needs to be done in this area, he expects this to be finalised ‘in the next couple of months.’