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Accounting for leases in Mexico

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​published on 17 June 2021 | Reading time approx. 2 minutes


Under the new mexican accounting standard NIF D5, lessees are required to recognise in their balance sheets assets and liabilities arising from most leases. With such changes effective for financial years starting from 2019, this has already led to significant changes in the balance sheets of companies in mexico over the last two years.

 

 

Objective of the NIF D5

In order to provide users of financial statements of companies in Mexico with a more accurate view of the net assets, financial position and results of operations, the principles for the recognition, measurement and disclosure of leases have been revised.


Scope of application of the NIF D5

In principle, all leases, with the exception of very few special cases, are covered by the new standard. The new standard does not apply to the accounting for leases that are of short-term nature (< 1 year) and/or where the underlying asset is of low value.


Most common types of lease in Mexico

The majority of medium-sized companies with foreign capital should consider the following types of lease:

  • Lease of land;
  • Lease of buildings;
  • Lease of machinery;
  • Lease of vehicles.

Accounting

The lease is accounted for by calculating the present value of the lease. In this process, the future lease payments are discounted over the term of the contract using a discount rate at the market level. The present value calculated in this manner is considered the historical cost of the so-called value in use at the date of contract conclusion. At the same time, a lease liability is recognised on the liabilities side in the same amount. The subsequent measurement on the asset side is carried out based on the straight-line depreciation of the asset over the term of the lease. On the liabilities side, the liability is reduced – in most cases – by payment of the monthly lease and increased by the interest expense arising from the present value method. Assets and liabilities therefore generally do not reduce each other by the same amount, but they no longer have a carrying amount at the end of the contract period.


Challenges in practice in Mexico

In general, it should be noted that accounting in Mexico is very rarely done based on Mexican commercial law. Accountants in Mexico rather tend to resort to tax laws, which means that accounting amendments and more complex issues such as lease are considered locally on an isolated basis only in very few cases. In the case of lease, this is aggravated by the fact that this approach to the accounting treatment does not apply under Mexican tax laws and here the monthly lease expenses are taken into account for tax purposes. This becomes problematic for foreign corporate groups that prepare their financial statements according to the International Financial Reporting Standards (IFRS). This is because IFRS 16 has been adopted in Mexico as a word-for-word version in the form of NIF D5. Local financial statements that are consolidated into group financial statements must therefore comply with the new lease standard. Failure to comply with it often results in issuing qualified audit opinions, at least in the local financial statements, due to the significant amounts involved in the leases.


Conclusion

Especially for German medium-sized groups with subsidiaries in Mexico, it is a challenge to be able to implement all accounting standards and amendments worldwide across the group without loss of quality. Alone due to the geographical distance to Mexico, there is a great risk, especially in view of the still relatively new lease standard, that the local accounting department does not have the necessary expertise to introduce such accounting measures, which have an impact on the entire group, promptly and without any problems. To ensure that the bookkeeping and accounting processes run smoothly, it is recommended that the company have an always up-to-date accounting manual in place, which ideally should also be available in Spanish to the subsidiary. Regular training of local staff with practice-oriented case studies should also be daily fare.

 


However, the following aspects also need to be mentioned:

The net effect on the income statement (depreciation and interest) for standard lease contracts is almost identical to the previous method of accounting for monthly lease expenses and thus has no significant impact on the result. The extension of the balance sheet to include the recognition on the asset and liabilities side alone changes companies' key figures as a result of the new accounting approach. Also corporate groups that continue to prepare their accounts in Germany in accordance with the German Commercial Code (HGB) do not have to fear any effects if the new lease standard is not applied, as the tax decrees related to leases distinguishing between operating and finance leases continue to apply under German commercial law.
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