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IFRS 16 Leases: a More Transparent Balance Sheet

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IFRS 16 Leases: a More Transparent Balance Sheet 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/ifrsfirms 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 Kimber Bascom, stores. The larger the lease portfolio, the KPMG’s global IFRS greater the impact on key reporting metrics.” leasing standards leader © 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. 2 What’s the issue? Currently analysts adjust financial statements for off- balance sheet leases Under IFRS 16, companies will bring these leases on balance sheet, using a common methodology © 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. 3 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 © 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. 5 Impact on balance sheet Companies with operating leases will appear to be more asset-rich, but also more heavily indebted Asset Liability © 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. 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. 7 Impact on financial ratios Profit/loss Balance sheet Ratios EBITDA Total assets Gearing EPS Net assets Interest cover (in early years) Asset turnover © 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. 8 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 ON OFF test New standard LeaseON Service Finance Operating Old standard lease lease © 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. 10 Lease definition – Control The new definition increases focus on who controls the asset and may change which contracts are leases Lease Not a lease ? © 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. 11 Lease definition – Exemptions Two major optional exemptions make the standard easier Short term Leases of low to apply leases value items ≤ 12 months ≤ USD 5,000 for example © 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. 12 Measuring the lease liability Present value of Present value of expected Lease liability = lease rentals payments at + end of lease © 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. 13 Variable lease payments Which variable lease payments are included in the lease liability? Payments based on an Payments based on index or rate turnover or usage © 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. 14 Lessor accounting Lease classification Lessor accounting test remains similar to current practice… Finance leases and operating leases but lacks consistency Consistent with new lessee accounting model for accounting model lessors and 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. 15 Sale-and-leaseback Is there a sale? IFRS 16 essentially kills Ye s No sale-and-leaseback as an off-balance sheet On-balance On-balance financing structure sheet financing, sheet lease at potentially at fair cost 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. 18 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. 19 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 Leases on balance sheet Lessor definition for lessees accounting Lessee Detailed measurement Exemption accounting and transition for low value model requirements 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. 21 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 Database of all leases? on your company’s financial statements 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. 23 Next steps Read the new Think about your Watch out for our standard implementation detailed analysis plan at kpmg.com/ifrs © 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. 24 kpmg.com/socialmedia kpmg.com/app © 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG network of independent
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