AASB 16 Leases - assets.kpmg

1 aasb 16. Leases A fundamental overhaul of lessee accounting effective 2019. Understanding the impact to your company A new leasing standard Transition to aasb 16. aasb 16 Leases removes the concept of operating and On transition to aasb 16 an entity will have a number of finance Leases for lessees which exists under aasb 117 interdependent options and practical expedients available. Leases , replacing it with a single accounting model under The different transition options will result in a different which lessees must recognise all Leases (including property impact on transition and subsequently to the balance sheet and equipment) on the balance sheet as a new right of and profit or loss.

2 We therefore recommend companies use asset' and lease liability'. Small value assets and short model the various transition option results to their balance term Leases are excluded. The rules for lessors have not sheet and profit or loss going forward to assist in the significantly changed. The change to bring the majority of determination of the most optimal transition method. Leases on balance sheet was driven by the IASB to improve transparency, comparability and disclosure of companies' Business-wide impacts leasing activities. As well as financial reporting changes, aasb 16 also has business-wide impacts, including, but not limited to, What is the impact of the new standard?

3 Modifications and management of: The changes in accounting are not limited to the balance New leasing systems to capture data and perform sheet. For example, the lease expense profile will be calculations;. front-loaded for most Leases , even when rental payments are constant year-to-year. New information will also be Debt covenants and credit rating, given new debt on required to support the determination of new judgments balance sheet;. and estimates used in the calculation of the leased asset Impairment tests and tax effect accounting , given and liability on inception date and throughout the lease. increase in assets and liabilities; and These include lease term, discount rates, in-substance lease payments, rents linked to a rate or index, expected Opex, capex approval processes and buy vs.

4 Lease payments under residual value guarantees and inclusion strategies. of purchase options and termination payments. These impacts should be managed and carefully communicated Although the economic benefits and risks of leasing does to stakeholders at both the transition date and on an ongoing not change, the new lease accounting model will change key basis. financial metrics and KPIs and introduce volatility to the balance sheet and profit or loss due to continual re-measurement Impact on lessee balance sheet requirements. As such, careful communication of this impact Impact on lessee balance sheet to key stakeholders such as investors, banks and credit rating agencies will be critical.

5 Expected impact to KPIs / ratios Profit or loss Balance sheet Ratios Asset Liability Asset Liability Total asset Companies with operating Leases EBITDA Gearing Companies Companies with will appearwith to be operating Leases more asset-rich, operating Leases w ill appear to be Total liabilities will more appear but also moreto be asset-rich, more heavily but asset-rich, alsoindebted more heavily indebted. but also more heavily indebted EPS Net assets Asset (in early years) (in early years) turnover Impact on lessee profit or loss Impact on lessee profit or loss Companies will see an increase in their EBIT / EBITDA profitability and ratios given the lease expense will be reported below the line.

6 An increase in leverage ratios will reflect additional debt on the balance sheet from the lease liability. Depreciation Interest Depreciation Cash rental payments Interest Cash rental payments Total Total lease lease expense expense willwill be be front- front-loaded even when Total loaded lease even expense when will rentals cash be front- cash rentals are constant. loaded even when cash rentals are constant are constant 2018 kpmg , an Australian partnership 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 and are registered trademarks or trademarks of kpmg International.

7 Liability limited by a scheme approved under Professional Standards Legislation. What are your next steps? One of the biggest hurdles your organisation may face is obtaining an understanding of your lease portfolio characteristics and setting up new systems, processes and controls to manage your lease portfolio going forward. Organisations should not under-estimate the time required to collect lease data and assess the impact of the new standard. Below are suggested steps to ensure a successful transition to the new lease accounting standard. Establish your project team Select transition option 1 Who is leading and supporting your 4 Which transition method will you apply?

8 Implementation project? Do you have all the data to be able to Which business areas should be apply the full retrospective approach? involved? Will you apply any optional exemptions? Are there any training requirements to What will you say about aasb 16 in your raise awareness? 2018 annual report? Understand your lease portfolio Gap assessment of current systems, 2 How many Leases do you have? 5 processes & controls Where is your lease information stored? Which processes and controls for affected business units will need to be modified or Do you have all the data required to established? calculate a right of use asset and a lease liability? Can your existing systems cater for the new data and measurement requirements or will Could there be any embedded Leases in a new system be required?

9 Service contracts? Which accounting policies will you need to What new Leases will you sign by 2019? update? Where are accounting judgments and assumptions required? Determine future state design 6 How will you implement, test and embed new Investigate structural solutions to 3 reduce impact systems, processes and controls? What are your timing, cost and resource Which terms can you negotiate to restraints? reduce your lease liability or eliminate volatility? Implementation Can alternative off balance sheet arrangements be structured? 7 Will your company be set up to meet the requirements of aasb 16 by 2019? Can you deliver on your implementation plan?

10 Implementation timeline Disclose impact in annual finance statements: 31 Dec. 2018. 2015 & prior 2016 2017 2018 2019 2020 & beyond aasb 16 issued Jan. 2016 Comparative start: 1 Jan. 2018 Effective Date: 1 Jan. 2019. (if full retrospective option is chosen). kpmg provides a range of services and solutions that can help your organisation successfully implement aasb 16, please see next page to understand how we can assist you. 2018 kpmg , an Australian partnership 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 and are registered trademarks or trademarks of kpmg International.