New rules on finance leases in Italy to remain unclear until new international standard takes effect

With the introduction of IFRS 16, the International Accounting Standards Board (IASB) has - for the first time in more than 30 years - changed the rules on accounting for operating and finance leases.

While it brings substantial and complicated changes, this new accounting standard makes the accounting treatment of leasing more consistent for the lessee.

According to IFRS 16, the lessee must recognise all assets and liabilities relevant to the leasing transaction in the statement of assets and liabilities (except for leases with a duration of 12 months or less and contracts for assets of low value). The new standard is effective from 1 January 2019, however companies that apply IFRS 15 may apply IFRS 16 before this date.

In international accounting standards, leases are also regulated by IAS 17, pursuant to which all lessees must recognise finance leasing according to the financial method (which requires the assets and liabilities of a leasing contract to be recognised in the statement and liabilities of the lessee). For operational leases, however, IAS 17 requires application of the equity method rather than the financial method.

With regard to national standards in Italy, this new rule is not clearly mentioned in the regulations set forth by Legislative Decree 139/2015, which transposed and implemented EU Directive 34/2013 relevant to financial statements, consolidated financial statements and relevant reports for corporations and other companies identified by the law. Section 2423-bis was reworded, eliminating the phrase "the items must moreover be valued taking into account the objective function of the assets and liabilities in question" and introducing number 1-bis which states that "the items are recognised and presented by taking into account the substance of the transaction or contract".

The recognition and accounting treatment of the leasing contract in accordance with section 2427, paragraph 1 no. 22, does not seem to comply in full with the provisions of the amended section 2423-bis, (1-bis), in terms of prevalence of substance over form. Consider for example the case of a financial leasing contract where the doubt is whether it should only be "presented" in the financial statements for its substance or also "recognised" in terms of the substance of the transaction rather than the form.

In addition, given that the provisions of section 2427 (22) (Contents of the Explanatory Notes) have remained unchanged, the regulations introduced by the new Legislative Decree 139/2015 are also very unclear since they still appear to support the principle of representing the leasing transaction in the financial statements according to the equity method, thus supporting the prevalence of "form" over "substance".

The white paper on the above legislative decree indeed clearly states that financial statements items should not be valued according to the "economic function of the asset or liability", but the "substance of the relevant transaction or contract". It also highlights the choice made to keep the current structure (namely representation according to the equity method) pending the introduction of the new international accounting standard relevant to leasing contracts.
The legislator has delegated the Italian Accounting Body (OIC) to take the necessary steps to change the national accounting standards.

Given the introduction of the new accounting treatment rules published by the IASB in accordance with IFRS 16, the OIC will most likely also adapt the national accounting standards on leasing contracts.

The application of the financial method does not appear to raise any tax issues, since it is recognised by the Italian tax authorities, with the subsequent deductibility of amortisation/depreciation and financial charges according to Italian Income Tax Law and IRAP regulations.

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