Domestic airlines will see “varying effects” on their profits in the coming years as they will be required to show all aircraft leases on their balance sheets under a new accounting standard, according to experts. Leasing of aircraft rather than outright purchase is a common practice in the airlines industry worldwide. Once the new accounting standard is in place, the carriers would have to show all such leases on their respective balance sheets which would result in “substantial new assets and liabilities”. The Indian Accounting Standard 116 (Ind AS 116) — which sets out the principles for recognition, presentation and disclosure of leases — is proposed to be effective from April 2019. Implementation of this standard is expected to have significant impact on the financials of airlines. At present, many airlines keep the leasing expenses off the balance sheet and under the new standard, all leasing contracts would be reflected in it.
Besides, experts opined that it would make aircraft sale and lease back practice less attractive as airlines would have to recognise assets and liabilities arising from the lease back. “Airlines industry will now be required to recognise all the leases on the balance sheet. As a result, airlines’ industry will account for substantial new assets and liabilities. “… the standard (Ind AS 116) is expected to have varying effects on each airline entity based on number of aircrafts taken on leases by that particular entity,” ICAI President Nilesh Shivji Vikamsey told PTI. Most carriers are already seeing wafer thin margins as deeply discounted fares and rise in aviation fuel prices along with staff costs take a toll on their overall profitability. Against this backdrop, the new accounting standard is likely to further trim their bottomline on account of leasing costs. The objective of the Ind AS 116 is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions, the ICAI (Institute of Chartered Accountants of India) said in its draft exposure on the standard.
Ind AS 116 is the equivalent of IFRS (International Financial Reporting Standards) 116. The standard would impact the reported assets and liabilities of airline industry depending on the nature and significance of former off balance sheet leases, Vikamsey said in a detailed response on queries related to Ind AS 116. Those airlines having almost all the aircraft on leases are expected to change significantly in contrast to others having few planes on lease, he added. Pratiq Shah, Partner at consultancy Deloitte Haskins & Sells LLP, told PTI that the standard can be expected to have a significant impact, particularly for entities that have previously kept a large portion of their financing off-balance sheet in the form of operating leases. Under this standard, the operating lease-style accounting treatment would be available only for short-term leases or those that have less than 12 months tenure and those for low value assets.
To a query on if there would be an immediate impact on the financials of Indian carriers after Ind AS 116 implementation, he said those airlines that have chosen the option to lease aircraft with an intention to keep them off- balance sheet would see a change in the financial statements. When asked about the possible impact of Ind AS 116 on its balance sheet, a senior Air India official said all future lease rentals would have to be shown as liabilities and the aircraft as assets.