Commercial Property Blog

Legal Tips and Traps

Small business loans for leases: Under the Accountant's hammer

Posted by Dean Claughton on 11 Feb 2016

Assisted by Holly Pitt.

Ralph Martin, audit technical director at Crowe Horwath, has said that the International Accounting Standards Board has issued an update that removes ‘operating’ leases. The change is expected to take effect 1 January, 2019 and will mean that all leases will be treated as ‘finance’ leases and liabilities.

This change means that small business owners, who lease their premises, may have to renegotiate their loans with their banks. Loan agreements often have calculations based on debt, equity and interest, all of which could be affected by this update.
 
Mr Martin commented on this change, suggesting that the update could trigger a breach in a loan covenant that could give the bank the right to demand repayment of the loan in full - definitely not an ideal outcome for small business owners.
 
Although the change is three years away, it’s a good idea to start preparing yourself for it sooner rather than later. 
 
Crowe Horwath has released a White Paper on the change: ‘The End of the Operating Lease’.
 
It is also important that you seek professional legal advice as to how this change will affect your business. If you have any questions about this, or the lease terms for your own small business, please do not hesitate to contact: