Wednesday, July 26, 2017

New accounting standards likely to create turbulence for airlines

India’s aviation industry might be flying into a debt cloud when new accounting standards come into force in 2019. Carriers may see their loans liability soar by more than Rs 50,000 crore, with the latest set of rules calling time on the established practice of aircraft leasing.

The biggest impact of the switch would be on low-fare, asset-light airlines, especially IndiGo, which rely on lease-rentals for their operations. The new global accounting norms – IFRS 16 – would also affect legacy carriers such as Jet AirwaysBSE -1.86 % and Air India, which have adopted the industry best practice to lower their upfront costs. Net cash outgo for carriers, however, may not increase after the changeover.

A spokesperson at IndiGo declined to comment, saying the airline is in a silent period as its April-June earnings are to be announced shortly. A senior executive at Jet said there would “definitely be an impact” but didn’t elaborate.

"It weighs down the balance sheet with representative debt more than actual debt," rued a senior executive at SpiceJet, saying that since there are assets backing the debt, the switch wouldn’t change valuations of an airline based on net worth.
26/07/17 Anirban Chowdhury/Economic Times

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