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Duff & Phelps, the premier global valuation and corporate finance advisor, cautions that there are numerous corporations at risk of being caught unprepared for the challenge of implementing the impending changes to accounting requirements for leased assets. The new standard, IFRS 16 - Leases, was issued by the International Accounting Standards Board (IASB) in 2016 and will become effective in less than a year on January 1, 2019.
New lease accounting rules under IFRS 16 come into force next January and require imminent action to ensure compliance and prepare comparative data
Large-scale impact to EBITDA predicted in some industries
Retail, real estate and transport industries will be particularly affected
The new rules require most operating leases to be recorded on balance sheets, whereas previously only finance leases were recognized. For several industries, such as retail, real estate, airline, transport and energy, this could well become one of the most material items on their balance sheets.
The airline industry will be particularly affected, according to research from Europe Economics, with nearly one-third of companies potentially seeing an EBITDA impact above 100 percent. The retail industry will also see considerable impact, with the same research predicting that approximately 37 percent of companies will have an EBITDA impact of 50 percent and above.
In addition to the impact on balance sheets, IFRS 16 may cause significant changes to profit and loss (P&L) and cashflow statements, along with EBITDA metrics and credit ratios. Duff & Phelps cautions that, as a result, it may have a considerable effect on market sentiment, share prices, analyst coverage and even credit ratings in some industries.
For entities with significant operating leases, the impact may be substantial and it is crucial they start preparing for adoption as soon as possible. Ultimately, companies should already be evaluating the impact of transition options and practical expedients not just on their financial statements, but also on the internal systems required to track the wealth of new data required for each lease.
Michael Weaver, Managing Director of UK and Middle East Valuation Advisory practices at Duff & Phelps, comments:
“With less than a year until these new standards of reporting are enforced, companies face being overwhelmed by additional requirements unless they start preparing a strategy now. Firms with large numbers of operating leases, from retailers to airlines, are especially in the firing line.
“The first step will be understanding the scope of change approaching, and anticipating the effects on balance sheets, cash flow statements and beyond. From there, it will be a case of preparing comparatives and aiding a smooth transition. Those with a laissez-faire approach to implementation risk losing out along the line.”
Duff & Phelps cautions that there are numerous corporations at risk of being caught unprepared for the challenge of implementing the impending changes to accounting requirements for leased assets
An overview of the new standard on leases can be found here
Read more about IFRS 16 here
Watch our webcast here
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M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of Duff & Phelps Securities, LLC. M&A advisory and capital raising services in the United Kingdom and across Europe are provided by Duff & Phelps Securities Ltd. (DPSL), which is authorized and regulated by the Financial Conduct Authority. In Germany M&A advisory and capital raising services are also provided by Duff & Phelps GmbH, which is a Tied Agent of DPSL. Valuation Advisory Services in India are provided by Duff & Phelps India Private Limited under a category 1 merchant banker license issued by the Securities and Exchange Board of India.