ifrs 16 leases - kpmg › ... › slideshare-present-o-1601-04.pdf · © 2016 kpmg ifrg limited, a...
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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.
IFRS 16 LeasesA more transparent balance sheet
13 January 2016
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.
“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.”
More transparent lease accounting
Kimber Bascom,
KPMG’s global IFRS leasing standards leader
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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.
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
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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.
Major impacts for lessees
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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.
Lessees face major changes
Balance sheet P&L
Asset
Liability
Depreciation
+ Interest
= Front-loaded total leaseexpense
= ‘Right-of-use’ of underlying asset
= Obligation to make lease payments
All major leases on balance sheet
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Lease expense
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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.
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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© 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
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Total lease expense will be front-loaded even when cash rentals are constant
Depreciation Interest
Cash rental payments
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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.
Impact on financial ratios
GearingEBITDA
EPS (in early years)
Net assets Interest cover
Asset turnover
Total assets
RatiosProfit/loss Balance sheet
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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.
New definition,new accounting
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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.
OFF
ON
Lease definition
Old standard
New standard
Operating lease
Service
Finance lease
Lease
The new on/off-balance sheet test for lessees – a key judgement area
ONLease
classification test
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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.
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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© 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 – Exemptions
Two major optional exemptions make the standard easier to apply
Leases of low value items
Short term leases
≤ 12 months ≤ USD 5,000for example
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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.
Measuring the lease liability
Present value of expected
payments at end of lease
Present value of lease rentals +=Lease liability
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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.
Variable lease payments
Payments based on an index or rate
Payments based on turnover or usage
Which variable lease payments are included in the lease liability?
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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.
Lessor accounting
but lacks consistency with new lessee accounting model
Lessor accounting remains similar to current practice…
Lease classification test
Finance leases and operating leases
Consistent accounting model for lessors and lessees
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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.
Sale-and-leaseback
IFRS 16 essentially kills sale-and-leaseback as an off-balance sheet financing structure
Is there a sale?
On-balance sheet lease at
cost
On-balance sheet financing,
potentially at fair value
Yes No
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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.
Multiple transition options
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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.
Applying the new lease definition
Apply the new definition to all contracts
ComparabilityCost
Grandfather existing contracts and apply the new definition only to new contracts
OR
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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.
Applying the new standard
Retrospectively to all accounting periods
ComparabilityCost
A lessee can choose to apply the standard…
As a ‘big bang’ at the date of initial application
OR
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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.
IFRS ≠ US GAAP
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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.
IFRS vs US GAAPWe expect the FASB to publish its new standard soon
Lease definition
Lessee accounting
model
IFRS and US GAAP standards converged?
Leases on balance sheet for lessees
Lessor accounting
Detailed measurement and transition requirements
Exemption for low value
items
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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.
Next steps
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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.
Things to think about now
Some questions to assess the impact on your company’s financial statements
Which contracts are leases?
Which transition options to choose?
Database of all leases?
Systems and processes in place?
What about ratios and covenants?
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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.
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.
© 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.
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