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January 2019

IFRS 16 - The New Lease Accounting Standard

A Ranking of the Leasing Obligations of the FTSE 350 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

BACKGROUND AND HISTORY OF IFRS 16

Starting on 1 January 2019, companies will begin to adopt the new IFRS 16 lease accounting standard published by the International Accounting Standards Board (IASB). As one of the biggest accounting changes in history, IFRS 16 will result in listed companies transferring almost $3 trillion worth of liabilities onto corporate balance sheets over the coming years.

Historically, only finance leases – leases that have a similar structure to asset purchases – have been reported as assets and liabilities on corporate balance sheets. Other leases, called operating leases, were “off-balance sheet” and were accounted for using principles similar to service contracts.

Following the major accounting scandals of the early 2000s such as WorldCom, Enron, and Arthur Andersen, off-balance sheet liabilities became a major focal point for the regulatory agencies that govern the markets in various countries around the world. Regulators were concerned that without corporations reporting leases on balance sheets, investors and analysts did not have sufficient information to evaluate the financial position of a company or easily make comparisons between peers in the same industry.

In an effort to provide greater transparency, the IASB, which defines standards for international financial reporting, introduced a new set of lease accounting standards. IFRS 16 was first published in January 2016 and will supersede the current lease accounting standard IAS 17.

IFRS 16 eliminates the operating leases classification. Instead, all leases will be treated as finance leases. The IFRS 16 standard was published in conjunction with the updated US GAAP lease accounting standard, ASC 842, though the standards differ on several key points, including that ASC 842 maintains the dual classification of leases as operating and finance. The IFRS 16 standard still allows short-term (less than or equal to 12 months) and low-value (less than or equal to $5000) leases to be reported in the footnotes.

Additional information on IFRS 16 is available on https://www.ifrs.org/projects/2016/ifrs-16-leases/.

Source: International Accounting Standards Board - IFRS 16 Effects Analysis

www.leaseaccelerator.co.uk 2 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

WHO WILL BE MOST IMPACTED BY THE NEW LEASE ACCOUNTING STANDARDS?

LeaseAccelerator ranked the operating lease obligations of the FTSE 350 as of November 2018. It sourced the operating lease obligations data from each company’s latest annual report (posted on the investor relations page of the company’s corporate website) as of November 2018. The numbers have been rounded up to the nearest ten thousand for presentation purposes. Numbers reported in a currency other than the were converted. No other manipulations of the data have been performed.

Operating lease obligations are comprised of two principle categories:

1. Real Estate – most companies lease rather than own the office buildings, distribution centres, stores, research labs, manufacturing plants, and data centres used to run their operations.

2. Equipment – companies also lease technology assets such as computers, servers, and data centre equipment to support their IT initiatives as well as transportation assets like forklifts, trucks, railway carriages, and marine vessels to move goods through the supply chain.

For most companies, the monetary value of the portion of the lease portfolio is higher than the equipment portion. However, corporations tend to have a far greater number of equipment assets than real estate assets, complicating administration and accounting efforts.

LeaseAccelerator’s analysis of the FTSE 350 index companies found that , BP, Sainsbury’s, , and International Group have the highest operating lease obligations. The highest leasing obligations are concentrated among companies from the energy, airlines, retail, , and financial services sectors.

• Energy companies such as Royal Dutch Shell and BP typically lease a diverse range of assets, including offshore drilling rigs, tankers, terminals, pipelines, storage tanks, railway freight carriages, petrol, and convenience stores.

•  companies such as International Airlines Group, TUI Group, and typically lease significant space at airports for check-in, baggage checking, and departure gates. Additionally, these groups lease a significant percentage of the aircraft and components used to fly cargo and passengers to and from destinations.

• Retailers such as Sainsbury’s, Marks & Spencer, and typically lease a large footprint of real estate for their stores and distribution centres as well as IT assets such as servers, storage, and data centre equipment to support their e-commerce operations.

• Telecommunications firms such as Vodafone Group and BT Group lease a mix of real estate and equipment assets including mobile phone towers, data centre properties, fibre optic circuits, and networking equipment.

• Financial institutions such as HSBC, , and The Royal Bank of typically lease a large footprint of real estate, including bank branches and office buildings, as well as technology assets such as servers, storage, and data centre equipment to support online banking and electronic trading operations.

www.leaseaccelerator.co.uk 3 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

COMPANIES RANKED BY OPERATING LEASE OBLIGATIONS Rank Company Industry Operating Leases (MM) 1 Royal Dutch Shell Oil & Gas Producers £18,279.42 2 BP Oil & Gas Producers £10,868.59 3 Sainsbury’s & Retailers £10,019.00 4 Vodafone Group Mobile Telecommunications £8,621.32 5 International Airlines Group Travel & Leisure £6,796.38 6 BT Group Fixed Line Telecommunications £6,597.00 7 IWG Miscellaneous Commercial Services £5,057.50 8 Associated British Food Producers £4,614.00 9 Marks & Spencer General Retailers £4,196.00 10 FirstGroup Other Transportation £3,622.10 11 Retail hospitality £3,579.60 12 HSBC Banks £3,076.56 13 Tesco Food & Drug Retailers £2,599.00 14 BBA Aviation Investment Trusts/Mutual Funds £2,576.00 15 Barclays Banks £2,536.00 16 TUI Group Travel & Leisure £2,311.41 17 Royal Group Banks £2,279.00 18 Personal Goods £2,182.45 19 Wizz Air Airlines £2,111.31 20 Specialty Stores £2,057.00 21 Banks £2,054.00 22 CRH plc & Materials £1,947.25 23 Merlin Entertainments Movies/Entertainment £1,897.00 24 Rolls-Royce Holdings Aerospace & Defence £1,871.00 25 General Retailers £1,847.70 26 Tritax Big Box REIT Wholesale Distributors £1,842.83 27 Investment Trusts/Mutual Funds £1,832.10 28 Greene King Restaurants £1,827.10 29 Food & Drug Retailers £1,769.00 30 BAE Systems Aerosapce & Defense £1,646.00 31 Movies/Entertainment £1,625.00 32 Hospital/Nursing Management £1,590.90 33 BHP Mining £1,565.33 34 Group Mining £1,437.02 35 SSP Group Restaurants £1,424.50 36 & M European Retail Value Real Estate Development £1,257.78 37 Shire plc Pharmaceuticals & Biotechnology £1,230.39 38 Assura Real Estate Investment Trusts £1,215.10 39 Pearson plc Media £1,201.00

www.leaseaccelerator.co.uk 4 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

Rank Company Industry Operating Leases (MM) 40 Industrial transportation £1,067.00 41 GlaxoSmithKline Pharmaceuticals & Biotechnology £1,045.00 42 Life £853.00 43 Support Services £841.96 44 W H Smith Specialty Stores £841.00 45 Sports Direct Apparel/Footwear Retail £839.90 46 Real Estate Development £833.00 47 Banks £819.38 48 Personal Goods £800.40 49 BCA Marketplace Beverages: Non-Alcoholic £761.60 50 Wetherspoon (J D) Restaurants £727.55 51 Department Stores £701.90 52 Mitchells & Butlers Restaurants £693.00 53 Wood Group Oil Equipment & Services £672.40 54 Oil & Gas Production £670.67 55 Mining £617.65 56 Hospital/Nursing Management £607.00 57 Support Services £561.00 58 Superdry Apparel/Footwear Retail £558.20 59 Group Specialty Stores £555.40 60 WPP plc Media £548.60 61 JD Sports Apparel/Footwear Retail £507.50 62 Support Services £506.20 63 Financial Services £502.80 64 Life Insurance £486.02 65 RELX Group Media £484.00 66 Legal & General Life Insurance £472.00 67 G4S Miscellaneous Commercial Services £470.00 68 Howden Joinery Specialty Stores £464.80 69 Jardine Lloyd Thompson Insurance /Services £455.73 70 Group Other Transportation £445.10 71 Tobacco £445.00 72 Gas, Water & Multi-utilities £443.00 73 Metro Bank Regional Banks £419.28 74 Real Estate Development £416.30 75 InterContinental Group Travel & Leisure £415.92 76 Inchcape Specialty Stores £410.70 77 AstraZeneca Pharmaceuticals & Biotechnology £406.89 78 Department Stores £400.00 79 Mining £399.11

www.leaseaccelerator.co.uk 5 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

Rank Company Industry Operating Leases (MM) 80 Support Services £397.60 81 Ei Group Restaurants £396.00 82 Gas, Water & Multi-utilities £388.00 83 Ocado Food & Drug Retailers £373.60 84 Forestry & Paper £369.97 85 Casinos/Gaming £362.50 86 easyJet Travel & Leisure £352.00 87 DCC plc Support Services £344.98 88 Benckiser Household Goods & £340.00 89 Rank Group Casinos/Gaming £330.70 90 RSA Insurance Group Nonlife Insurance £327.00 91 SIG plc Building Products £321.40 92 Beverages £312.00 93 General Industrials £311.27 94 Support Services £300.70 95 Aberdeen Financial Services £297.00 96 Investment Managers £293.88 97 Gas, Water & Multi-utilities £292.90 98 Carnival Corporation & plc Travel & Leisure £291.75 99 Investment Banks/Brokers £267.58 100 CYBG Regional Banks £267.00 101 Ted Baker Apparel/Footwear £266.69 102 Engineering & Construction £261.40 103 TP ICAP Investment Banks/Brokers £244.00 104 NewRiver Real Estate Investment Trusts £240.72 105 Group Non-life Insurance £232.10 106 Unite Group Real Estate Development £217.80 107 Millennium & Copthorne Hotels Hotels//Cruiselines £217.00 108 ContourGlobal Electric Utilities £211.75 109 Smith, D.S. General Industrials £210.00 110 Hays Personnel Services £208.20 111 Oil & Gas Production £203.32 112 Tobacco £203.00 113 Group Financial Services £198.00 114 Stobart Other Transportation £194.67 115 Domino’s Pizza Restaurants £186.04 116 Support Services £183.61 117 Smith & Nephew Health Care Equipment & Services £182.26 118 SSE plc Electricity £174.60 119 Industrial Machinery £173.50

www.leaseaccelerator.co.uk 6 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

Rank Company Industry Operating Leases (MM) 120 Provident Financial Finance/Rental/Leasing £170.10 121 Food: Specialty/Candy £168.00 122 Cobham Aerospace & Defense £167.10 123 Nonlife Insurance £166.60 124 Card Factory Specialty Stores £165.30 125 Water Utilities £162.90 126 TI Fluid Systems Auto Parts: OEM £159.70 127 General Industrials £155.00 128 Grainger Wholesale Distributors £152.65 129 Food Retail £150.64 130 Support Services £149.70 131 St. James’s Place plc Life Insurance £148.70 132 Information Technology Services £147.50 133 Food: Major Diversified £138.10 134 TalkTalk Group Specialty Telecommunications £136.00 135 ITV plc Media £136.00 136 PageGroup Personnel Services £135.89 137 Coca-Cola HBC AG Beverages £135.62 138 Antofagasta Mining £134.13 139 Media £132.00 140 Chemicals £114.00 141 Software & Computer Services £110.67 142 Wireless Telecommunications £105.96 143 Bakkavör Investment Trusts/Mutual Funds £98.90 144 Electric Utilities £98.00 145 NMC Health Health Care Equipment & Services £97.22 146 Automobiles & Parts £96.50 147 Clarkson Marine Shipping £93.60 148 RPC Group Containers/Packaging £92.00 149 IMI Miscellaneous Manufacturing £91.90 150 Investment Managers £89.29 151 Oilfield Services/Equipment £81.50 152 UDG Healthcare Medical Distributors £80.54 153 Financial Conglomerates £77.40 154 Household Goods & Home Construction £75.60 155 Oil & Gas Production £73.86 156 Engineering & Construction £68.20 157 Electrical Products £67.50 158 Marshalls Construction Materials £65.22 159 Entertainment One Wholesale Distributors £64.10

www.leaseaccelerator.co.uk 7 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

Rank Company Industry Operating Leases (MM) 160 Engineering & Construction £61.60 161 Investment Banks/Brokers £58.30 162 Industrial Specialties £57.50 163 Packaged Software £56.18 164 Multi-Line Insurance £55.01 165 Sophos Information Technology Services £53.48 166 Investment Managers £52.50 167 RHI Magnesita Construction Materials £51.97 168 Dairy Crest Food: Meat/Fish/Dairy £51.90 169 Betfair Travel & Leisure £51.58 170 Hunting Oilfield Services/Equipment £50.86 171 Holdings Investment Trusts/Mutual Funds £50.62 172 Coats Textiles £48.90 173 ConvaTec Medical Specialties £48.12 174 Beverages: Non-Alcoholic £47.80 175 Miscellaneous Commercial Services £45.70 176 Wholesale Distributors £45.50 177 Halma Electronic & Electrical Equipment £45.03 178 Packaged Software £44.69 179 Equiniti Miscellaneous Commercial Services £44.50 180 Property/Casualty Insurance £43.70 181 Electric Utilities £43.50 182 Ibstock Construction Materials £43.29 183 Food: Meat/Fish/Dairy £42.43 184 Holdings Aerospace & Defense £41.92 185 Multi-Line Insurance £41.90 186 AA Other Consumer Services £40.00 187 James Fisher & Sons Marine Shipping £38.80 188 Moneysupermarket.com Group Other Consumer Services £37.90 189 Miscellaneous Commercial Services £37.80 190 Advertising/Marketing Services £37.40 191 Homebuilding £36.40 192 TR Property Investment Trust Real Estate Investment Trusts £34.95 193 Chemicals: Specialty £34.70 194 Pharmaceuticals: Generic £34.48 195 Casinos/Gaming £34.40 196 Steel £33.28 197 Financial Services £32.00 198 Just General Retailers £31.00 199 Spirax-Sarco Engineering Industrial Machinery £30.80

www.leaseaccelerator.co.uk 8 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

Rank Company Industry Operating Leases (MM) 200 Chemicals £30.70 201 Bank of Other Transportation £30.22 202 Miscellaneous Commercial Services £30.00 203 Vesuvius Miscellaneous Manufacturing £29.60 204 Financial Services £28.60 205 GVC Holdings Travel & Leisure £28.28 206 QinetiQ Aerospace & Defense £28.20 207 Cranswick Food: Meat/Fish/Dairy £26.80 208 Household Goods & Home Construction £25.20 209 Bovis Homes Group Homebuilding £25.09 210 Recreational Products £24.67 211 BTG Pharmaceuticals: Other £24.40 212 Intermediate Capital Group Investment Managers £24.10 213 FDM Group Information Technology Services £22.12 214 Real Estate Investment Trusts £21.00 215 Diploma Wholesale Distributors £20.90 216 Genus Agricultural Commodities/Milling £20.80 217 Pharmaceuticals: Other £20.38 218 Industrial Machinery £19.27 219 Chemicals: Specialty £18.49 220 General Retailers £18.00 221 Randgold Resources Mining £17.98 222 Real Estate Investment Trusts £17.40 223 Renishaw Electronic Equipment/Instruments £16.98 224 Holdings Life/Health Insurance £16.00 225 Polypipe Building Products £15.50 226 Tate & Lyle Food: Specialty/Candy £14.00 227 Homebuilding £13.90 228 Homebuilding £13.60 229 Specialty Insurance £13.15 230 IntegraFin Holdings Investment Managers £13.10 231 Regional Banks £13.00 232 Software & Computer Services £13.00 233 Saga Property/Casualty Insurance £12.90 234 Pharmaceuticals: Other £12.60 235 Household Goods & Home Construction £12.30 236 Media £12.27 237 IG Group Holdings Investment Banks/Brokers £12.10 238 Other Consumer Services £12.00 239 Just Group Life/Health Insurance £11.90

www.leaseaccelerator.co.uk 9 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

Rank Company Industry Operating Leases (MM) 240 KAZ Minerals Other Metals/Minerals £11.76 241 Charter Court Financial Services Finance/Rental/Leasing £11.40 242 Oil & Gas Oil & Gas Production £10.45 243 Hastings Group Property/Casualty Insurance £9.80 244 Precious Metals £9.40 245 PZ Cussons Household/Personal Care £9.30 246 Household Goods & Home Construction £9.30 247 Investment Managers £9.20 248 Redrow Homebuilding £9.00 249 RIT Capital Partners Investment Trusts/Mutual Funds £8.90 250 Barr, A.G. Major Banks £8.30 251 Gas, Water & Multi-utilities £8.30 252 Go-Ahead Group Other Transportation £7.70 253 Real Estate Development £7.10 254 Capital & Counties Properties Personnel Services £6.70 255 Investment Trusts/Mutual Funds £6.40 256 IP Group Miscellaneous Commercial Services £6.30 257 Chemicals: Major Diversified £5.90 258 Real Estate Investment Trusts £5.10 259 Shaftesbury Real Estate Investment Trusts £4.60 260 Sirius Minerals Chemicals: Agricultural £4.10 261 Mining £3.86 262 Gas Distributors £3.59 263 St. Modwen Properties Other Transportation £3.00 264 Regional Banks £2.72 265 OneSavings Bank Other Consumer Services £2.60 266 Precious Metals £2.53 267 Information Technology Services £2.41 268 TBC Bank Major Banks £1.88 269 Investment Trusts/Mutual Funds £1.63 270 Senior Aerospace & Defense £1.30 271 Homebuilding £1.10 272 Hill & Smith Miscellaneous Manufacturing £1.00 273 Real Estate Investment Trusts £0.84 274 Stagecoach Group Real Estate Investment Trusts £0.80 275 Euromoney Institutional Investor Data Processing Services £0.71 276 Morgan Advanced Materials Industrial Specialties £0.60 277 Telecommunications Equipment £0.60 278 Precious Metals £0.56 279 Amigo Financial Conglomerates £0.50

www.leaseaccelerator.co.uk 10 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

Rank Company Industry Operating Leases (MM) 280 Aerospace & Defense £0.40 281 LondonMetric Property Real Estate Development £0.34 282 Specialty Telecommunications £0.31 283 Real Estate Development £0.20 284 Investment Trusts/Mutual Funds £0.07 285 Investment Managers £0.00 286 Fidelity Special Situations Investment Trusts/Mutual Funds £0.00 287 HICL Infrastructure Company Investment Managers £0.00 288 Renewables Infrastructure Group Investment Managers £0.00 289 Aberforth Smaller Companies Trust Investment Trusts/Mutual Funds Data Not Available Information Technology Services Data Not Available Baillie Trust Miscellaneous Commercial Services Data Not Available Engineering & Construction Data Not Available BBGI Investment Managers Data Not Available BlackRock Smaller Companies Trust Investment Trusts/Mutual Funds Data Not Available British Empire Trust Investment Banks/Brokers Data Not Available Financial Conglomerates Data Not Available City of London Investment Trust Investment Trusts/Mutual Funds Data Not Available Civitis Social Housing Real Estate Investment Trusts Data Not Available CLS Holdings Real Estate Development Data Not Available Real Estate Development Data Not Available Real Estate Development Data Not Available Dragon Trust Investment Trusts/Mutual Funds Data Not Available Edinburgh Investment Trust Investment Trusts/Mutual Funds Data Not Available Industrial Metals & Mining Data Not Available F&C Trust Investment Trusts/Mutual Funds Data Not Available F&C Global Smaller Companies Investment Trusts/Mutual Funds Data Not Available Investment Trusts/Mutual Funds Data Not Available Investment Trusts/Mutual Funds Data Not Available Finsbury Growth & Income Trust Investment Trusts/Mutual Funds Data Not Available Foreign & Colonial Investment Trust Investment Trusts/Mutual Funds Data Not Available GCP Infrastructure Investments Investment Managers Data Not Available Genesis Emerging Markets Fund Investment Trusts/Mutual Funds Data Not Available Greencoat UK Wind Investment Managers Data Not Available HarbourVest Global Private Equity Investment Managers Data Not Available Investment Trusts/Mutual Funds Data Not Available Investment Trusts/Mutual Funds Data Not Available International Public Partnerships Investment Managers Data Not Available Properties Real Estate Investment Trusts Data Not Available JPMorgan American Investment Trust Investment Trusts/Mutual Funds Data Not Available

www.leaseaccelerator.co.uk 11 IFRS 16 - The New Lease Accounting Standard A Ranking of the Leasing Obligations of the FTSE 350 JANUARY 2019

Rank Company Industry Operating Leases (MM) JPMorgan Emerging Markets Investment Trust Investment Trusts/Mutual Funds Data Not Available JPMorgan Indian Investment Trust Investment Trusts/Mutual Funds Data Not Available JPMorgan Japanese Investment Trust Investment Trusts/Mutual Funds Data Not Available Jupiter European Opportunities Trust Investment Trusts/Mutual Funds Data Not Available Land Securities Real Estate Investment Trusts Data Not Available Mercantile Investment Trust Investment Trusts/Mutual Funds Data Not Available Investment Trusts/Mutual Funds Data Not Available Murray International Trust Investment Trusts/Mutual Funds Data Not Available NB Global Investment Trusts/Mutual Funds Data Not Available Investment Managers Data Not Available Perpetual Income & Growth Investment Trust Investment Trusts/Mutual Funds Data Not Available Data Not Available Investment Trusts/Mutual Funds Data Not Available Investment Banks/Brokers Data Not Available Polar Capital Technology Trust Investment Trusts/Mutual Funds Data Not Available Primary Health Properties Real Estate Development Data Not Available Quilter Investment Managers Data Not Available Riverstone Energy Investment Managers Data Not Available Real Estate Investment Trusts Data Not Available Schroder AsiaPacific Fund Investment Trusts/Mutual Funds Data Not Available Scottish Investment Trust Investment Trusts/Mutual Funds Data Not Available Scottish Mortgage Investment Trust Equity Investment INstruments Data Not Available Sequoia Economic Infrastructure Income Fund Investment Trusts/Mutual Funds Data Not Available Miscellaneous Commercial Services Data Not Available Investment Trusts/Mutual Funds Data Not Available Temple Bar Investment Trust Investment Trusts/Mutual Funds Data Not Available Templeton Emerging Markets Investment Trust Investment Trusts/Mutual Funds Data Not Available UK Commercial Property Trust Investment Trusts/Mutual Funds Data Not Available Vietnam Enterprise Investments Investment Trusts/Mutual Funds Data Not Available VinaCapital Vietnam Opportunity Fund Investment Trusts/Mutual Funds Data Not Available Worldwide Healthcare Trust Investment Trusts/Mutual Funds Data Not Available

The FTSE 350 Index represents large and mid cap stocks traded on the (LSE), which pass screening for size and liquidity. The FTSE 350 index is made up of the constituents of the FTSE 100 and FTSE 250 index