Key Takeaways from the third EaaS capacity building webinar in Belgium

On May 5th 2022, Agoria held a capacity building webinar on “EaaS Financial and Accounting implications ” in which guest speakers Christian Levie from Econocom, and Baptiste Desbois from BNP Paribas Fortis explored the challenges and risks faced by EaaS suppliers and financing institutions with regards to financing Efficiency-as-a-Service projects and how partnerships between the two can tackle these challenges. Guest speaker Thomas Carlier from Deloitte presented the accounting implications scenarios according to IFRS 15 & 16 for suppliers and customers engaging in an EaaS agreement.

Transitioning from selling an equipment to an EaaS offering comes with a set of challenges that a partnership with a financial institution may help overcome:

• Expanse of the balance sheet: an EaaS supplier that remains the owner of the asset supplied as-a-Service (aaS) will have its asset remaining on its balance sheet and will therefore see its balance sheet expanding.
• Pre-financing need: in an EaaS offering, the revenues are spread over time, thereby decreasing the revenues in the short term which is coupled to a debt increase as the number of assets supplied aaS increase.
• Recurring Invoicing: offering EaaS will imply invoicing the customer on a monthly bases
• Credit risk: where the sales of an equipment may entail a very short term credit risk, a 10 to 15 years EaaS contract will entail that the credit risk the EaaS supplier takes on his customer spreads over a much longer period of time. The rates will evolve accordingly.

A number of financial solutions are available to EaaS suppliers, each with its own characteristics in terms of type and % of asset that is being financed, financing period, investment size, rate, guarantees needed. While no perfect solutions exists and trade-offs will have to be made, the following financing mechanisms can address a number of hurdles faced by EaaS providers: 

• Back to back lease: in which the EaaS supplier sells the equipment to a leasing partner which leases it back to the EaaS provider for a certain amount of time.
• Partnership with a leasing company that leases the equipment directly to the end customer. This enables the outsourcing of the monthly invoices and of the credit risk, a reduction of debt and an immediate booking of revenue.
• Factoring: in which the bank purchases the receivables of the contract. The bank is then responsible for invoicing the end customer. Such a solution allows for an off-balance treatment of the EaaS agreement from the EaaS supplier and transfers the credit risk on the customer to the bank.

From a Financial Institution point of view, financing EaaS agreement is challenging in that it couples risks associated to a project with risks linked to the counterparties. Partnering with a financial institution  will enable a redistribution of risks and will unburden the EaaS provider from the credit risk on his customer. There are however some risks, such as the performance risk – i.e. the risk that the customer might decide to suspend his payment should he not be satisfied with the service or performance delivered by the EaaS supplier – that the EaaS provider needs to remain responsible for. 

What is key for financing partner’s perspective is to understand and have a clear view of the risks the EaaS project carries, the potential impacts it may have and what mitigation measures are being taken or foreseen.  The EaaS provider needs to address how might the business plan be affected by influencing factors (e.g.  evolution in energy price, variation in consumption pattern), how will the SLR be managed and guaranteed, what could be the consequence in case of technical issues and how these associated risks are being addressed and mitigated.

There are multiple accounting frameworks, and the rules with respect to the treatment of this kind of arrangement differ depending on the accounting framework considered. 

IPSAS/IFRS is substance driven compared to Belgium GAAP implying that it is the economic reality independently from the form of the contract that need to be assessed.

The qualification of the agreement as a (financial) lease or not will impact the revenue/expense recognition, P&L and EBITDA. It is to be addressed separately for the customer and the EaaS provider. While EaaS providers often aim at providing and off-balance solution to their customer, some customers may prefer an on-balance treatment of the asset in order to increase their EBITDA.

Key questions from the suppliers’ perspective:

1. Does the equipment supplied under the EaaS agreement meet the IFRS condition to be treated as a finance lease?
   • If so, the supplier will account as if the asset had been sold, thereby with the revenues recognised immediately. The EaaS supplier will have a lease receivable, and from a P&L point of view an interest income on that receivable.
   • If not, the revenue attached to the equipment bought will be recognised over time.
2. Is the installation configuration, customization services provided at the beginning – if any-  viewed as a separate deliverable from the rest of the services that the EaaS provider is supplying?

• • If so, the EaaS supplier needs to disaggregate the contract into different deliverables with the initial installation services recognised immediately and the recurrent services recognized over the duration of the contract.

Key questions from the customers’ perspective:

1. Does the equipment component in the contract meet the definition of a lease under IFRS 16 ?
   • If so, the customer will be obliged to recognise the fixed or committed lease payment on his balance sheet.
   • If not, the asset will be off the customer’s balance sheet which will negatively affect its EBITDA.
2. Are there installation / configuration / customization services provided in the context of the EaaS agreement?
   • If there initials service which are viewed as a separate deliverable, a distinct performance obligation, the associated expense will need to be immediately recognised. If the customers falls outside of the lease accounting rules, this may create a mismatch as the customer may not capitalise the installation costs as part of the leased assets.
   • If not, the expense will be spread over the duration of the agreement.

What is key in distinguishing a lease from a service contract? 

• Is that there is an identified asset? 
• Does the customer have the right to obtain all the economic or substantially all the economic benefit from the use of that assets over a certain period of time?
• Who has the right to direct how and for what purpose the asset is used?
• Does the right have the right operate the asset throughout the period of use? Did the customer design the asset to respond to his needs? 

The webinar can be viewed on the EaaS project Youtube Channel

• Christian Levie, Deputy Managing Director of Econocom Lease, Econocom Belux. Christian is executive board member of the Belgian Lease Association and has a career of over 30 years in financing and leasing. Econocom supports companies and governments in the implementation of as-a-service business models, product-service combinations, leasing solutions. Econocom acts as a financing partner: it supports the financing of investment projects and the preparation of credit files and helps to find alternative credit lines. Econocom offers support in the accounting, financial, administrative and contractual processes required when moving from a traditional sales model to an as-a-service model.
• Baptiste Desbois, Senior Advisor Clean & Greentech, BNP Paribas Fortis. Baptiste is an engineer with more than 10 years of experience in the energy sector (decarbonation of the energy mix, risk management and energy procurement). Within the Sustainable Business Competence Centre at BNP Paribas Fortis which he newly joined, Baptiste aims at accompanying customers in their transition towards sustainability and has a specific focus on energy related topics such as solar panels, wind turbines, biogas & biomass, batteries.
• Thomas Carlier, Audit and Insurance Partner, Deloitte.  As Audit & Assurance partner, Thomas is heading the Brussels IFRS/IPSAS Centre of Excellence, a team of experts in accounting and financial reporting. With 20 years of experience in this area, he has gained a deep expertise in financial reporting with a focus on IFRS, IPSAS and Belgian GAAP. Thomas is responsible for the IFRS quality review process applicable to public interest entities that Deloitte is auditing in Belgium. Moreover, Thomas acts as direct IFRS advisor for large Belgian listed companies and leads numerous GAAP technical consultations and advisory projects, including IFRS/IPSAS conversions and implementation of new reporting standards.