Research by global advisory firm KPMG suggests that new lease accounting proposals which would bring most leases on-balance sheet for lessees could add over US$100 billion of debt on the balance sheets of the top 20 global airlines and about US$80 billion on to the balance sheets of the world’s 50 biggest shipping companies.*

The proposals by the IASB and FASB, published in May 2013, represent a major shake-up of lease accounting and would have a significant impact on airlines, aviation financiers as well as the shipping industry. Two separate reports published by KPMG today – Leases: Final Approach or Go-around and Shipping Insights – Bigger Balance Sheets – take a closer look at the proposals and examine their potentially wide ranging impact on the airline and shipping industry.

John Luke, Lead Partner at KPMG’s global transport practice comments: “This is on of the most far-reaching accounting shake-ups proposed since IFRS was widely adopted. If these proposals come into effect in 2017 the consequences particularly for the airline and shipping industry will be far-reaching. If companies have to add billions of pounds of debt on to their balance sheets, it will ultimately affect banking covenants, taxation and possibly the ability to pay dividends.

“Key questions all lessees and lessors need to ask themselves now are how the new rules would affect them, whether their systems and people are up to task and how the new requirements would affect their leasing products. We also encourage all interested parties to send their comments on the proposals to the IASB and FASB before the September deadline.”

Key implications of proposals for the airline sector:

The proposals would accelerate recognition of lease expense for most leases of aircraft currently classified as operating leases

Lease liabilities would be adjusted for foreign exchange but the right-of-use asset would not – potentially creating income statement volatility

A complex new accounting model would apply to aircraft lessors

Key implications for the shipping industry:

Many charterers would see an increase in reported assets and liabilities

Proposals affect ‘big-ticket’ vessel charters and leases such as terminal and office space

New ‘dual models’ for both lessees and lessors, with property leases retaining the straight-line expense method

Remaining leases will result in amortization and interest expense (similar to today’s finance leases), which could adversely affect net profit