This is a slightly technical post but highly relevant if you for certain types of businesses where leasing is prevalent.
Come 2019, new accounting standards (specifically IFRS 16) will come into effect which will drive up the leverage ratios of businesses which have significant leases liabilities.
The new leases standard – IFRS 16 – will require companies to bring most leases on-balance sheet from 2019.
Explaining it in layman terms
Let us think about this in terms of you buying a car.
The normal route to buying a car would be for you to take a car loan.
You would take ownership of the asset in your name, and the corresponding debt to pay for it too.
The alternative way to do it is to lease it.
A lease is simply a contractual arrangement that allows the lessee (user) to pay the lessor (owner) for use of an asset.