Tuesday, August 01, 2017

How airlines are facing turbulence from an accounting change on plane leases

As if the competitive environment in the airline space were not enough, airline companies are likely to face headwinds from a completely new direction.

The Institute of Chartered Accountants of India (ICAI) is bringing in changes in Indian Accounting Standard 116 (Ind AS 116). Ind AS 116 covers leases and sets out the principles for the recognition, measurement, presentation, and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. India is merely aligning itself with changes in international accounting standards.

Global finance woke up to the loophole in the treatment of leasing in the wake of the accounting scandals of Enron, WorldCom, and HealthSouth between 2001 and 2003. It was then that the US Congress rolled out the groundwork for what is being termed as the Sarbanes-Oxley (SOX) Act.

The goal of SOX was to protect investors from corporate fraud. The new lease accounting standards bring a much higher level of transparency to leases. All leases longer than 12 months must be capitalized and reported on a company’s balance sheet as assets and liabilities.

For lessees like airline operators, all leases will be classified as an operating or financing lease, with both being capitalized, while for lessors the leases will be classified as an operating, direct financing or sales type lease.

The reason this is a cause of worry for India’s airline sector is that many airlines have aircraft that have been ‘procured’ on an operating lease or a sale-and-leaseback arrangement. As per this arrangement, the seller of an asset leases back the same asset from the purchaser. The lease arrangement is made giving details of the lease rentals and the time period.
01/08/17 Shishir Asthana/Moneycontrol