Financial, Sector

Lease and IFRS 16

Whilst asset leasing is a widely used financial construction, to date, it has never been applied to industrial textiles. In order for textile assets to be qualified as an entity that is fit for lease, it first needs to be transformed into a ‘true’ asset.

Historically, banks have shown no interest in offering financing solutions for textiles as these were considered a commodity with little or no residual value. This market gravitates around NFR (Non-Financial Risk) opportunities, and focuses heavily on assets that maintain high residual values, like technology and motor vehicles.

However, our control technology transforms a textile article into an assets with a demonstrable residual value at the end of its lifecycle. By doing so, we have created options to access an area of the finance market in which Asset Finance Companies (AFC) operate. This is a niche within the financial industry centred on a very specific product: asset and credit rights financing.

Effective January 2019, lease accounting is governed by IFRS 16, a standard that replaced IAS 17. For who’s interested: a little bit of history. In 2003, the International Accounting Standards Board (IASB) issued International Accounting Standard 17 (IAS 17), governing the treatment of leases. IAS 17 allowed considerable discretion in determining whether a lease was an ‘operating lease’, which could be held off the balance sheet, or a ‘finance lease’, which could not.

IAS 17 used a dual model classification approach. Finance leases were capitalized on the statement of financial position as an asset and liability, and reported on the profit and loss statement as an interest and depreciation expense. However, IAS 17 allowed companies to report operating leases in the footnotes of financial disclosures, which the IASB considered an accounting loophole.

Keeping operating leases off the balance sheet was believed to obscure the true nature of a company’s liabilities from potential investors. In an effort to increase transparency, IASB in 2016 announced the new accounting standard IFRS 16, which introduced significant changes to the treatment of leases, aimed at balance sheet transparency.

What is important for any business that incurs a variable cost for laundry related activities, is that a fixed lease cost is accounted below EBITDA. This is an important metric for any business as it is often used as the basis of performance and valuation.