IFRS 16 - Leases Standard

How Deloitte can help

Significant preparation is required by companies and the time to take action is now. Our Financial Reporting Advisory team can assist management to succesfully navigate and implement this complex new standard.
Our publication ‘Need to Know’ provides a high level overview of the new accounting standard which will assist companies in gaining an understanding of the standard and its key impacts.

Our point of view documents listed below contain some Industry specific considerations for some of the industries affected by the introduction of IFRS 16:

• Financial Services 
• Aviation Industry 
• Power and Utilities
• Telecommunications
• Property Occupiers
  

Financial Services – implications of the new leasing standard

• IFRS 16 Leases was published in January 2016 and is effective for periods beginning on or after 1 January 2019, (subject to EU endorsement).
• Changes to the definition of a lease mean arrangements previously outside the scope of lease accounting may now be captured and vice versa.
• The distinction between operating and finance leases will no longer apply for lessees, and a right-of-use asset will be recognised on the balance sheet together with a lease liability for most lease arrangements.
• The right of use asset recognised may have regulatory capital consequences on adoption of IFRS 16.
• Straight line operating lease expenses will be replaced with depreciation and front-loaded interest.
• For lessees’ sale and leaseback transactions only the gain on the portion of the asset not leased back is recognised immediately.
• For lessors, the requirements remain largely unchanged, however the changes for lessees may lead to a change in the length and terms of arrangements they are willing to enter into as well as requests for more pricing information.
  

Aviation – implications of the new leasing standard

• For lessees with operating leases an ‘aircraft’ (right‑of‑use) asset will come on balance sheet together with a lease liability.
• Significant KPIs including ROCE will be affected – for some it will increase, for others decrease.
• For foreign currency leases there will be increased profit and loss volatility as the lease liability is retranslated.
• For a ‘wet’ lease only payments for the aircraft need to be recognised, the service element may be separated with the accounting unchanged.
• The changes for an entity and the comparison with peers will need to be explained to stakeholders.

Power and Utilities – implications of the new leasing standard

• The distinction between operating and finance leases will no longer apply for lessees, and a right-of-use asset will be recognised on balance sheet together with a lease liability for all but the most insignificant lease arrangements.
• Changes to the definition of a lease mean that arrangements previously outside the scope of lease accounting may now be captured, while others currently in scope may not meet the revised definition.
• EBITDA will generally increase as an operating lease expense is replaced by depreciation and interest, but gearing will also increase, impacting entities’ capacity to take on additional debt.
• For lessors, the requirements remain largely unchanged, however as a result of the changes impacting lessees, lessors may see a change in the length and terms of arrangements lessees are willing to enter into.

Telecommunications – implications of the new leasing standard

• For lessees with operating leases a right-of-use asset will come on balance sheet together with a lease liability.
• Determining whether a contract gives control of a specific asset may require a significant level of judgement for contracts such as network services.
• Leases with a term of 12 months or less and containing no purchase options, and those for low value assets may be accounted for as services.
• Previous high level analysis of current disclosures indicates a possible average increase in EBITDA margin of 2.5 percentage points.
• Previous research of the world’s largest 50 telecoms operators suggests as much as $125 billion right-of-use assets will be added to balance sheets, and the level of gross debt increase by between 15-20%.

Property occupiers - implications of the new leasing standard

• Most property leases will come on-balance sheet for lessees, prompting recognition of a right-of-use asset and a liability for the lease component, but not the maintenance or other service component of payments.
• Straight line operating lease expenses will be replaced with depreciation and front-loaded interest.
• There is no requirement to estimate variable payments. Those varying with an index or rate are initially measured at the rate on the date of commencement, and are subsequently remeasured.
  or sale and leaseback transactions only the gain on the portion of asset not leased back is recognised immediately.
• Capturing all the necessary data for implementation could be a sizeable task. Two particular practical challenges will be determining appropriate discount rates and remeasuring the asset and liability when payments change.