New financial rules sow corporate fear

Ecuadornews:

It sounds a little crazy to believe that a rental property will now become an asset of a company, even if it does not belong to it. However, this is what the International Financial Information Standards (IFRS) that Ecuador undertakes to adopt in order to make the financial statements of the companies transparent. But this change generates concern. Begin to record this type of ‘assets’, warns, not only could become the payment of more taxes but affect the capacity of indebtedness that companies have.

IFRS 16, those that regulate leases and whose application will apply from 2019, begin by defining “all those resources that have the potential to produce economic benefits” as assets, a characteristic that these lease agreements also have. As the companies have those assets under their charge and make usufruct of them for a defined time, the rule says that they must be treated as an asset of their own. But that is not all. Miulín Chang de Herrera, partner of the audit firm Herrera Chang & Asociados, which is part of the RSM network (a global association of accountants), explains that this change also unifies the type of contracts that the Ecuadorian Accounting Standards classify between operations (rent common) and leasing (the goods that, at the end of the rent, could be bought), and therefore if before that common contract was only recorded as a monthly expense, now, like leasing, it should be included in both the assets as in the liabilities of a company, according to the value of the subscribed contract “and with it, to deduct and amortize. To the extent that it is paid, that liability will disappear and with it said asset “.

There are no complaints about this process. What worries, according to EXPRESO on August 20, is that the registration of these assets can disrupt the calculation of some taxes and result in a higher payment, especially those that are currently calculated based on the value of the assets (such as the advance payment of Income Tax, the contribution made to the Superintendence of Companies or the municipal tax payment of 1.5 per thousand).

Pablo Guevara, partner of the audit firm Andersen Tax & Legal, confirms this risk and agrees with Chang in believing that this should trigger an alert to the tax authorities. They should, he says, reformulate the way these taxes are calculated, except for this type of asset so that companies are not affected. This newspaper tried to analyze with the Internal Revenue Service (SRI) the impact that these rules would have, but representatives of the entity postponed the interview. This, while “dialogue and agreement is reached with business and professional associations.”

The fear is that the liquidity of the companies may be affected. Walter Jara, financial manager of Olam, a firm that depends on the rental of warehouses to process the cocoa that he exports, explained that another effect of registering this type of contract is that it will make the liabilities of the companies also grow, and that, while the contract lasted, it would be negative for anyone. “When reflected greater obligations (debts) this could complicate the financial situation of a firm, at the time you have to acquire debt to the banks. Its assessment deteriorates, “he said.

Legislation and its impact

What are the exceptions?

According to IFRS 16, since 2019 the remaining companies that do not record this type of asset within their assets are those that have lower value lease contracts and whose term is less than 12 months (1 year).

Which sectors would be affected?

This change, it is expected, will affect companies that are engaged in the distribution and sale of their products, manufacturing companies that lease equipment or any company that depends on the rental of real and personal property.

What is recommended?

The impact, it is estimated, will depend on the number of lease contracts and the time they have been subscribed. Experts suggest reviewing and weighing the cost-benefit of rental leases and assessing whether it is convenient to buy or continue leasing.

Internal standard

Deduction, also at risk

Article 10 of the Internal Tax Law stipulates that the expenses for leasing leasing contracts will not be deductible when this good belongs to the same related company. Auditors wonder if this provision should also apply to common contracts, since IFRS does not differentiate contracts. If this is the case, they warn, this would affect the corporations that usually rent goods to other companies that belong to the group. They ask to clarify the subject.

“Heritage is not affected”

What will happen when you have a contract as an asset but this one, from one moment to the next, is broken or is dispensed with?

It is eliminated in the periodic review of the State. A reversal entry is made and the asset is eliminated and therefore the liability because I no longer have the right to use that asset (which does not belong to me) and I will not have to pay it month after month. Nothing happens with the state.

Is there any impact for real estate businesses that are engaged in rent?

It does not affect them. The rule does not provide change for them, only for companies that rent these goods, in a certain time. The rest will continue working the same, taxing the same.

But while that asset is within my assets, how will that asset consist for the counterpart?

The owner will have it as investment property, the person who rents it and uses it will have it as an asset but as a right of use. As for taxes, if a person owns an office, they will receive income for the rent and they will continue to pay their income tax for that income. The person who takes rent that same office deducts that expense. (I)

Source: https://www.expreso.ec/economia/normas-financieras-temor-empresas-economia-EA2345006