ifrs-16-leases

IFRS 16 Leases A more transparent balance sheet

13 January 2016 © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member kpmg.com/ifrs firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

More transparent lease accounting “IFRS 16 will bring most leases on-balance sheet from 2019. All companies that lease assets for use in their business will see an increase in reported assets and liabilities. This will affect a wide variety of sectors, from airlines that lease aircraft to retailers that lease stores. The larger the lease portfolio, the greater the impact on key reporting metrics.”

Kimber Bascom, KPMG’s global IFRS leasing standards leader

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What’s the issue? Currently analysts adjust financial statements for offbalance sheet leases Under IFRS 16, companies will bring these leases on balance sheet, using a common methodology

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Major impacts for lessees © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Lessees face major changes All major leases on balance sheet Balance sheet

P&L

Asset

Lease expense

= ‘Right-of-use’ of underlying asset

Depreciation

Liability

+ Interest

= Obligation to make lease payments

= Front-loaded total lease expense

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Impact on balance sheet Companies with operating leases will appear to be more asset-rich, but also more heavily indebted Asset

Liability

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Impact on profit/loss Total lease expense will be front-loaded even when cash rentals are constant Depreciation

Interest

Cash rental payments © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Impact on financial ratios Profit/loss

Balance sheet

Ratios

EBITDA

Total assets

Gearing

EPS (in early years)

Net assets

Interest cover Asset turnover

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New definition, new accounting © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Lease definition The new on/off-balance sheet test for lessees – a key judgement area Lease classification test

New standard Old standard

ON

OFF

ON Lease

Service

Finance lease

Operating lease

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Lease definition – Control The new definition increases focus on who controls the asset and may change which contracts are leases

Lease

Not a lease

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Lease definition – Exemptions Two major optional exemptions make the standard easier to apply

Short term leases

Leases of low value items

≤ 12 months

≤ USD 5,000 for example

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Measuring the lease liability Lease liability

=

Present value of lease rentals

+

Present value of expected payments at end of lease

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Variable lease payments Which variable lease payments are included in the lease liability?

Payments based on an index or rate

Payments based on turnover or usage

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Lessor accounting Lessor accounting remains similar to current practice…

but lacks consistency with new lessee accounting model

Lease classification test Finance leases and operating leases

Consistent accounting model for lessors and lessees

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Sale-and-leaseback Is there a sale?

IFRS 16 essentially kills sale-and-leaseback as an off-balance sheet financing structure

Yes

On-balance sheet lease at cost

No On-balance sheet financing, potentially at fair value

© 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Multiple transition options © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Applying the new lease definition Cost

Comparability

Apply the new definition to all contracts OR Grandfather existing contracts and apply the new definition only to new contracts © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Applying the new standard A lessee can choose to apply the standard…

Cost

Comparability

Retrospectively to all accounting periods OR As a ‘big bang’ at the date of initial application © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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IFRS ≠ US GAAP © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

IFRS vs US GAAP We expect the FASB to publish its new standard soon IFRS and US GAAP standards converged? Lease definition Lessee accounting model

Leases on balance sheet for lessees

Lessor accounting

Detailed measurement and transition requirements

Exemption for low value items

© 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Next steps © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Things to think about now Which contracts are leases? Which transition options to choose?

Some questions to assess the impact on your company’s financial statements

Database of all leases? Systems and processes in place? What about ratios and covenants?

© 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Next steps

Read the new standard

Think about your implementation plan

Watch out for our detailed analysis at kpmg.com/ifrs

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© 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.