Under the new standard, at the start of a lease, the lessee obtains the right to use an asset for a period of time and has an obligation to pay for that right. Consequently the new standard requires lessees to recognise assets and liabilities arising from all leases on the balance sheet, subject to certain exemptions for short term (leases with a lease term of 12 months or less) and small asset leases (where the underlying asset has a low value when acquired).
Impact on the Balance Sheet
For companies that currently have significant operating leases, the new lease standard is likely to result in increase in liabilities with corresponding lease assets. This may have significant impact on key financial ratios derived from recognition of lease assets and liabilities (for example, leverage and performance ratios).
Impact on the Income Statement
As a result of implementing the new standard, EBITDA is likely to increase compared to the amounts reported today because, entities are required present the implicit interest component of lease payments as part of finance costs whereas, today, the entire lease expense is included within operating costs.
The net profit, however, is likely to decrease because interest expense is typically front loaded as the combined effect of amortization of lease asset and interest on lease liability is higher in the earlier years of a lease than in the later years and vice-versa.
We offer 3 stage solution which comprises of following
We also deploy lease implementation tool to automate the lease calculations and geretaing information for financial reporting and tax purposes.
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