Off balance sheet leases come to an end with IFRS 16 16 ... · Operational leases are off balance...
Transcript of Off balance sheet leases come to an end with IFRS 16 16 ... · Operational leases are off balance...
Discover and unlockyour potential…
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]
2
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?
3
16 June 2016Hot topics treasury seminar
PwC
Why is this important?
4
16 June 2016Hot topics treasury seminar
PwC
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?
5
16 June 2016Hot topics treasury seminar
PwC
Introduction & background
6
16 June 2016Hot topics treasury seminar
PwC
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
Introduction & background
7
16 June 2016Hot topics treasury seminar
PwC
IFRS 16 Leases was published in January 2016
Introduction & background
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
8
16 June 2016Hot topics treasury seminar
PwC
Introduction & background
FOOTNOTEOperating lease commitments
Guestimate
?
BALANCE SHEET TODAY
9
16 June 2016Hot topics treasury seminar
PwC
Introduction & background
Greater comparability and transparency
BALANCE SHEET COMPANY A BALANCE SHEET COMPANY B
LEASE ASSETS LEASE LIABILITIES LEASE ASSETS LEASE LIABILITIES
10
16 June 2016Hot topics treasury seminar
PwC
Introduction & background
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
11
16 June 2016Hot topics treasury seminar
PwC
Introduction & background
IFRS: International Financial Reporting Standards
US GAAP : Generally Accepted Accounting Principles
IFRS/US GAAP reporters AND subsidiaries affected
12
16 June 2016Hot topics treasury seminar
PwC
What are the changes?
13
16 June 2016Hot topics treasury seminar
PwC
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
14
16 June 2016Hot topics treasury seminar
PwC
What is the new accounting?
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
15
16 June 2016Hot topics treasury seminar
PwC
What is the new accounting?
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
16
16 June 2016Hot topics treasury seminar
PwC
What is the new accounting?
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
17
16 June 2016Hot topics treasury seminar
PwC
What is the new accounting?
A property lease example:
Lease term 5 years
Yearly payment EUR 1,000
Borrowing rate 4%
PV of lease payments EUR 4,452
18
16 June 2016Hot topics treasury seminar
PwC
What is the new accounting?
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
19
16 June 2016Hot topics treasury seminar
PwC
What is the new accounting?
(*) 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)
20
16 June 2016Hot topics treasury seminar
PwC
What is the new accounting?
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
21
16 June 2016Hot topics treasury seminar
PwC
• 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
22
16 June 2016Hot topics treasury seminar
PwC
What is the impact?
23
16 June 2016Hot topics treasury seminar
PwC
PwC Global Lease Capitalisation Study
PwC 2015 Global Lease Capitalisation Study Results
3.199public
companies
were
included
in the study
24
16 June 2016Hot topics treasury seminar
PwC
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
25
16 June 2016Hot topics treasury seminar
PwC
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
26
16 June 2016Hot topics treasury seminar
PwC
What behaviours will change?
27
16 June 2016Hot topics treasury seminar
PwC
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
28
16 June 2016Hot topics treasury seminar
PwC
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
29
16 June 2016Hot topics treasury seminar
PwC
QUESTIONS?
30
16 June 2016Hot topics treasury seminar
© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see http://www.pwc.com/structure for further details. Please see http://www.pwc.com/structure for further details. This proposal contains information that is proprietary and confidential to PricewaterhouseCoopers Accountants N.V., and shall not be disclosed outside the recipient's company or duplicated, used or disclosed, in whole or in part, by the recipient for any purpose other than to evaluate this proposal. Any other use or disclosure, in whole or in part, of this information without the express written permission of PricewaterhouseCoopers Accountants N.V. is prohibited.