A new Leasing Exposure Draft recently released by the International Accounting Standards Board (IASB) would affect nearly every organisation, at considerable cost to business, according to KPMG.

The changes would particularly affect every entity with significant operating leases of large, expensive assets such as aircraft, said Kris Peach, KPMG’s accounting standards partner.

Others who would be affected include those with leased assets in the mining, construction and transport sectors as well as entities with leased buildings, including head offices and retail premises.

“These changes would impact most Australian entities. Any entity with operating leases would have to alter significantly how it accounts for these in both the statement of financial position and profit and loss,” she said.

“We anticipate a difficult transition process for entities and urge those affected to express concerns to the IASB to help extend the usual 12 month implementation period.”

Lessees with operating leases coming onto the statement of financial position would experience an increase in assets and liabilities and would often see a front-ending of expenses in profit or loss, Peach said. Even for a lease currently classified as a finance lease, the lessee liability may be higher initially.

“These proposals will have particular relevance to lessees who are restructuring or renegotiating covenants, as they should take these potential changes into account now.

The proposals are a response to criticism of past lease accounting which was seen by some as too permissive of off-balance sheet accounting by lessees and dominated by arbitrary rules.

“Entities may struggle to determine the value of leases to recognise on their balance sheet as the measurement method would change for both the lessee and lessor,” said Peach.

“Retailers, for example, would be required to estimate the present value of rents based on turnover or inflation over the life of a 10 to 20 year retail lease for each leased store, revisiting those estimates each time they report. When corporate and distribution centre leases and car fleets are added to the mix the challenges increase.

“When you consider that many entities only forecast over periods of three years, there could be a lot of crystal ball gazing taking place,” cautioned Peach.