ifrs 16-leases-slideshare-jan-2016-160113021121

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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 Leases A more transparent balance sheet 13 January 2016 kpmg.com/ifrs

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Page 1: Ifrs 16-leases-slideshare-jan-2016-160113021121

© 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

Page 2: Ifrs 16-leases-slideshare-jan-2016-160113021121

© 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

Page 10: Ifrs 16-leases-slideshare-jan-2016-160113021121

© 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

Page 17: Ifrs 16-leases-slideshare-jan-2016-160113021121

© 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

Page 18: Ifrs 16-leases-slideshare-jan-2016-160113021121

© 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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