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The views provided in the letter are expressed for the purpose of providing an input for the Preliminary Consultative Document published by EFRAG on 12 October 2016 and the future draft endorsement advice that EFRAG will publish, on the basis of information currently available to the EBA.
As mentioned in the EBA’s response during the IASB’s consultation on the proposals for the changes in accounting for leases, the EBA welcomes the efforts of the IASB to improve financial reporting in the area of leasing and in particular the aim to reflect the substance and the economics of the lease transactions in the financial statements of both lessees and lessors. The current accounting treatment of leases under IAS 17 allows some assets and liabilities relating to leases to remain off-balance sheet, there is inadequate transparency of information about lease rights and obligations and the leverage position of lessees may not be accurately reflected. The EBA believes that the core principle of IFRS 16 in which a lessee is required to recognise assets and liabilities arising from a lease will improve the transparency of information about lease rights and obligations. For these reasons, the EBA supports the endorsement of IFRS 16 in the EU and agrees with EFRAG’s view that IFRS 16 brings a significant improvement to the reporting of leases when compared with IAS 17.
The EBA conducted a qualitative analysis of the interaction of IFRS 16 with the existing prudential requirements and a quantitative analysis of the impact of IFRS 16 on a sample of banks in EU to lessees. The qualitative analysis highlighted the existence of some areas of interaction of IFRS 16 with the prudential requirements, being the nature of the newly recognised assets (so called right-of-use -‘RoU’- assets) and the prudential treatment of these assets for capital, leverage and liquidity purposes. This analysis suggests that, overall, IFRS 16 will not raise significant challenges related to bank regulation. In quantitative terms, on the basis of the underlying assumptions used using the available information at the time the exercise was performed, the impact of IFRS 16 on own funds and leverage ratios is estimated to be of limited significance for the vast majority of the banks in the sample.