Financial Leasing in Egypt: IFRS 16 and Accounting Standards

Financial leasing in Egypt is considered one of the most prominent financial instruments that enable companies to acquire the assets they need without having to purchase them outright.

This approach helps reduce financing burdens and enhance operational efficiency. Given the importance of this tool in managing financial resources, the need arose to develop clear accounting standards to ensure transparency in financial reporting. With the accelerating global economic developments, Egypt moved to update its accounting standard related to financial leasing in line with the International Financial Reporting Standard (IFRS) 16.

This article reviews the background of financial leasing in Egypt, the reasons for revising the local standard, and its impact on companies and investors, while highlighting the role of Andersen Egypt in providing financial and accounting advice to help companies adapt to these changes.

Historical Background of the Financial Leasing Standard in Egypt

For a long time, financial leasing in Egypt was governed by Egyptian Accounting Standard (EAS) No. 20, which was designed according to traditional accounting principles. This standard differentiated between operating leases and finance leases, classifying lease contracts as follows:

• Operating Lease: Does not transfer most of the risks and rewards associated with asset ownership to the lessee. Consequently, the asset is not recorded on the lessee’s balance sheet, and lease payments are recognized as an expense in the income statement.
• Finance Lease: Transfers most of the risks and rewards related to asset ownership to the lessee, hence the asset and the related financial liability are recorded on the lessee’s balance sheet.

However, due to global economic developments and the desire of countries to achieve greater transparency in financial reports, it became necessary to update these rules to keep pace with international changes in accounting standards. This led to the issuance of Egyptian Accounting Standard (EAS) No. 49 in 2020, which aligns with IFRS 16.

IFRS 16 and Its Impact on Local Standards

In 2016, the International Accounting Standards Board (IASB) issued IFRS 16, which came into effect in 2019, replacing IAS 17. IFRS 16 significantly changed lease accounting by eliminating the previous classifications and requiring companies to recognize all lease contracts on the balance sheet. In line with these developments, Egypt adopted EAS No. 49 in 2020, which incorporates the principles of IFRS 16. As a result, companies are required to recognize all lease contracts in their assets and liabilities, with limited exceptions.

Reasons for Amending the Egyptian Standard

Enhancing Transparency and Financial Disclosure:
Under previous rules, companies could classify certain leases as operating leases, thereby keeping them off the balance sheet, which could negatively affect the accuracy of the financial position. The new standard ensures that all lease contracts are included in the financial statements, raising the level of transparency for investors and regulatory bodies.

Aligning the Egyptian Standard with International Standards:
Egypt seeks to unify its accounting framework with global standards—foremost among them IFRS 16—to facilitate the operations of international companies in the local market, improve Egypt’s standing in international reports, and thus attract more foreign investments.

Reducing Accounting Manipulation:
Under the old system, companies could restructure lease agreements to report lower financial liabilities. The new amendments limit such attempts and provide a more accurate assessment of financial risks, thereby enhancing the credibility of financial statements for regulatory bodies and investors.

Impact of the Amendments on Investors’ and Lenders’ Decisions:
More accurate financial data allows investors and lenders to better assess risk, leading to more informed decision-making. Banks and financial institutions can also grant loans and financing based on realistic information about companies’ repayment capacity.

With these substantial changes in accounting standards for financial leasing, companies must receive specialized accounting and financial consultations to ensure compliance with the new standards and avoid potential legal and financial risks. Andersen Egypt provides a wide range of advisory services regarding the assessment of how EAS No. 49 will affect companies’ financial statements, as well as offering strategies to adapt accounting systems to the new amendments.

Conclusion

Egypt’s financial leasing standards have become more aligned with international requirements following the adoption of EAS No. 49, which enhances the level of disclosure and reliability in financial statements. Undoubtedly, this step will boost the confidence of investors and financiers in the Egyptian market, in addition to increasing companies’ ability to secure necessary financing and compete globally in a rapidly changing business environment. To ensure optimal compliance with these changes, Andersen Egypt plays a pivotal role in providing financial and accounting advice, enabling companies to maximize the opportunities available under modern accounting standards.

To find out more, please fill out the form or email us at: info@eg.Andersen.com

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