Off balance sheet leases come to an end with IFRS 16 16 ... · Operational leases are off balance sheets (only expenses are recorded) Majority of lease contracts with lessee are classified

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Hot topics treasury seminarOff balance sheet leases come to an end with IFRS 16

16 June 2016

PwC

With you today

Jay TahtahPartnerCapital Markets and Accounting Advisory ServicesT: +31 (0)88 792 39 45M: +31 (0)6 20 30 13 04 [email protected]

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16 June 2016Hot topics treasury seminar

PwC

Agenda

Why is this important?

Introduction & background

What are the changes?

What is the impact?

What behaviours will change?

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Why is this important?

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Why is this important?Significant accounting change since 2005

Lease accounting change should be high on your agenda

New items on balance sheet and changes in the income statement will affect:

• Your financial information and organization

- Are you ready?

• Your financing and treasury arrangements

- What are your covenants and debt capacity?

• Your investors and other stakeholders

- How will they respond?

• Regulators

- What do they expect?

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Lease contracts classified as financial or operational leases today

Operational leases are off balance sheets (only expenses are recorded)

Majority of lease contracts with lessee are classified as (off balance sheet) operational leases

New rules will eliminate current off balance sheet accounting for lessees

Lessees will need to recognize nearly all leases on their balance sheet


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IFRS 16 Leases was published in January 2016


Lessee has to recognise a right-of-use asset and a lease liability for all lease contracts

On balance sheet accounting affects structure of lease contracts and will have pervasive impact on companies beyond accounting

Effective date1 January 2019

Lessee has to present interest expense (on lease liability) and depreciation charge (for right-of-use asset) separately

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FOOTNOTEOperating lease commitments

Guestimate

?

BALANCE SHEET TODAY

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Greater comparability and transparency

BALANCE SHEET COMPANY A BALANCE SHEET COMPANY B

LEASE ASSETS LEASE LIABILITIES LEASE ASSETS LEASE LIABILITIES

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March 2009: Discussion paper

August 2010: Exposure Draft

May 2013: Revised exposure draft

• Objective: Greater comparability and transparency

• Effective date: 1 January 2019 (early adoption permitted in conjunction with IFRS 15)

• EU-Endorsement: expected early 2017

January 2016:Final standard

July 1996: G4+1 - Leases: Implementation of a New Approach

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IFRS: International Financial Reporting Standards

US GAAP : Generally Accepted Accounting Principles

IFRS/US GAAP reporters AND subsidiaries affected

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What are the changes?

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What is the new accounting?

Income statement

Balance sheetRight-of-use asset/

Lease liability

Depreciation/Impairment(Right-of-use asset)

Interest expense(Lease liability)

Variable lease payments not included in lease liability

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Right-of-use asset Lease liability

Restoration costs

Initial direct costs

Lease payments

Discount rate

Lease payments made before or at commencement date

Provision

Lease liability

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Fixed payments

Variable lease payments

Residual value guarantees

+

+

Lease payments

For reasonably certain lease term

If they depend on index/rate e.g. CPI

Expected payments lessee has to make under guarantee

Exercise price of a purchase option

the lessee is reasonably certainto exercise the option

if

+

Penalties for terminating

+the lease term reflects the termination by the lessee

if

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Income statement

Right-of-use asset

Lease liability

Lease liability*

* Additional disclosures required

Balance sheet

Revenue

(…)

Depreciation and amortisation

Depreciation expense on the right-of-use asset

Finance cost

Interest expense on the lease liability

Right-of-use asset*

Property, plant and equipment

Financial liabilities

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A property lease example:

Lease term 5 years

Yearly payment EUR 1,000

Borrowing rate 4%

PV of lease payments EUR 4,452

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Balance sheet Income statement

Year Assets Liabilities Operating expenses (*)

Net income

0 - -

1 - - (1,000) (1,000)

2 - - (1,000) (1,000)

3 - - (1,000) (1,000)

4 - - (1,000) (1,000)

5 - - (1,000) (1,000)

Total (5,000) (5,000)

(*) Assuming the lease classifies as an operating lease under IAS 17 today

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(*) ROU asset straight-line depreciation

(**) Lease liability amortized using an effective interest method

Balance sheet Income statement

Year ROU asset (*)

Lease liability (**)

Amortisation of ROU asset

(*)

Interest expense

(**)

Net income

0 4,452 (4,452)

1 3,561 (3,630) (890) (178) (1,068)

2 2,671 (2,775) (890) (146) (1,036)

3 1,781 (1,886) (890) (110) (1,000)

4 890 (962) (890) (76) (966)

5 0 0 (890) (38) (929)

Total (4,452) (548) (5,000)

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850

900

950

1.000

1.050

1.100

1 2 3 4 5

An

nu

al

Ex

pe

ns

e

New IFRS 16 lease standard Current IAS 17 model (OL)

Current straight-line versus future front-loaded expense model

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• Two options for transition to this standard:

Transition

1

Retrospective application

2

Modified retrospective application

Modified retrospective application- No restatement of comparatives- Apply the incremental borrowing rate at date of

application- Apply a single discount rate to a portfolio of leases- Rely on previous assessment of whether a lease is

onerous (IAS 37)

- ROU asset can be measured equal to lease liability at date of application

- Account for leases which end within 12 months of initial application as short term leases.

- Exclude initial direct costs from measurement of ROU asset

- Use hindsight to determine if lease term if contract contains extensions / termination options

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What is the impact?

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PwC Global Lease Capitalisation Study

PwC 2015 Global Lease Capitalisation Study Results

3.199public

companies

were

included

in the study

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What is the impact?

Many other KPIs are redefined:- Solvency- Leverage- Asset Turnover- Interest cover- ROCE - ROE

May impact (future) transactions:- (re) financing or

raising capital- Lease versus buy

decisions- M&A- Sale and leaseback

Impacting various arrangements:- Financing and

covenants- Credit rating- Remuneration and

employee schemes- Tax arrangements

Need to manage stakeholders:- Banks/lenders- Investors/analysts- Rating agencies- Management/staff- Tax authorities- Oversight bodies

Balance Sheet

Assets

Liabilities

Income statement

Lease expense

Depreciation

Interest expense

EBIT

EBITDA

EBITDAR

EPS

Cash flow statement

Cash from ops

Cash from finance

Changes from current

off balance sheet

accounting

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What is the impact?

Treasury,

Finance

IT

Procurement

Financial planning/control

Investor relations

Audit committee

Lease versus buy

decisions

Lease portfolio

optimisation

Benchmarking vendors

and spending profile

Cost savings and

operational benefits

Lease automation

Involvement of IT group

Design new business and

technical requirements

Software vendor selection

Implementation and

integration IT solution

Scoping

Data gathering/validation

Judgments & Estimates

Project Management

Resources & Training

Disclosures

Transition options

Tenant

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What behaviours will change?

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Gross up of balance sheets

Increased admin burden for leases

Renegotiations with lessors and lenders

Optimisation of lease portfolio/funding

Sale and leaseback less attractive

Impact on lessees

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Change in lease versus buy?

Shorter lease terms? More renewal- and break options?

Increased variable rents or partial variable rents?

Low base rent, high service costs, triple net lease more popular?

More service and office capacity type?

Impact on tenant behaviour

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QUESTIONS?

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Documents

Off balance sheet leases come to an end with IFRS 16 16 ... · Operational leases are off balance sheets (only expenses are recorded) Majority of lease contracts with lessee are classified