D2-T2 Arrendamientos - Stephen Cooper

International Financial Reporting Standards

The new leases standard Steve Cooper, IASB Board Member November 2015

The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

Project status Publication of new Leases Standard In January 2014 joint redeliberations begin

Q2 2013

In May 2013 a revised Exposure Draft (2013 ED) published; over 640 comment letters received

Q1 2014

(effective date 1 January 2019)

Q1 2015

Re-deliberations complete in March 2015 (except effective date)

Dec 2015

The big picture

3

• Lessee accounting: single lessee model – All leases on-balance sheet1 – Interest and depreciation presented separately in income statement – Cash paid split into principal (financing activities) and interest (operating or financing activities) in cash flow statement

• Lessor accounting: little change to existing lessor accounting

1 With the exception of short-term leases and leases of low-value assets

The need for change • Leases create assets and liabilities • Most leases are not reported on the balance sheet • Long-term liabilities of heaviest users of off balance sheet leases1 understated by: – 26% Europe – 22% North America – 32% Asia Pacific

• Huge variation across and within industries (1) 1,022 IFRS/US GAAP listed entities (excluding banks and insurance companies) each with estimated operating lease liabilities of >$300M (discounted basis). Data obtained from financial data aggregators that may contain errors; this information should, therefore, be used with a degree of caution.

Effects of lessee accounting changes Current issues

Benefits of the new Leases Standard

 A lack of information  Investors attempt to estimate  Companies provide leaseadjusted information  A lack of comparability  No level playing field

Improved quality of financial reporting

Improved comparability

Currently a lack of information  6 retail chains that ultimately went into liquidation Retailer

(undiscounted) 1

(discounted)2

On balance sheet debt1

Borders (US)

$2,796M

$2,152M

$379M

5.68

Circuit City (US)

$4,537M

$3,293M

$50M

65.86

£652M

£525M

£58M

9.05

HMV (UK)

£1,016M

£809M

£115M

7.03

Praktiker (Germany)

€2,268M

€1,776M

€481M

3.69

Woolworths (UK)

£2,432M

£1,602M

£147M

10.90

Clinton Cards (UK)

Off balance sheet leases

Off balance sheet leases (discounted) as a multiple of on balance sheet debt

(1) Based on averaged published financial statements data available in the 5 years before the company entered Chapter 11 (US), liquidation (UK) or bankruptcy (Germany).

(2) Estimated using (i) a discount rate of 5% and (ii) estimated average lease terms based on the information disclosed in the financial statements.

Why investors need better information?

Expert investors attempt to estimate; others do not Asymmetry and inaccuracy of information in the market

• Many do not adjust reported numbers • More sophisticated investors do using estimation techniques (eg multiples of rent expense) – But based on incomplete information - difficult and inaccurate

Inaccurate adjustments 1,022 entities(1)

Long-term (LT) debt (In millions of US dollars)

LT debt to equity

Reported on balance sheet

If all leases on balance sheet

Common market practice (rent x8)

6,440,942

8,102,729

9,063,971

59%

74%

82%

(1) 1,022 IFRS/US GAAP listed entities (excluding banks and insurance companies) each with estimated operating lease liabilities of >$300M (discounted basis). Data obtained from financial data aggregators that may contain errors; this information should, therefore, be used with a degree of caution.

Companies also adjust …

Airlines

Retail

Hotels

Air France – KLM

Ahold

AutoZone

Accor

Alaska Airlines

Foot Locker

Home Retail Group (Argos, Homebase)

Whitbread (Premier Inn)

Delta Airlines

Nordstrom

Easyjet

Kingfisher (B&Q, Castorama)

Emirates

Sainsbury’s

Whole Foods

SAS Airlines

Transport and courier A.P. Moller – Maersk Group Deutsche Post

Oil and gas

Construction

Shell

Hochtief

Statoil

Travis Perkins

Lack of comparability Airline 1 (leases <10% of aircraft)

Airline 2 (leases ≈70% of aircraft)

Reported on balance sheet

If all leases on balance sheet1

Reported on balance sheet

If all leases on balance sheet1

Property, plant and equipment

16,908

19,926

15,748

24,020

Non-current liabilities

13,232

16,567

9,615

18,320

Equity

6,719

6,402

5,604

5,171

Ratio of non-current liabilities to equity

2.0:1

2.6:1

1.7:1

3.5:1

(1) The figures included in the “if all leases on balance sheet” columns are estimates using various assumptions about the discount rate and average lease term of leases held by each company.

Lessees affected by changes Li Percentage of IFRS/US GAAP entities who st report material off balance sheet leases ed 62% en North America titi Europe 47% es 43% on Asia / Pacific ly Africa / Middle East

23%

Latin America and Caribbean

23%

Total future minimum payments for off balance sheet leases (undiscounted)1

US$ 2.9tn

Present value of future minimum payments for off balance sheet leases (estimate)2

US$ 2.2tn

• Off-balance-sheet lease financing numbers substantial • About 50% of listed entities report material off balance sheet leases • Use of off balance sheet leases is highly concentrated 1 2014 annual reports for the vast majority of entities.

2 Estimate using the average cost of debt for these entities, that was 5%.

Lease vs service Lease

Service

Customer

Supplier

• Similar to the existing definition; changed guidance on control • Control = directing the use and obtaining the benefits from use • Separate services provided with leases

controls the use of an asset

controls the use of an asset

– Can use estimates – Practical expedient not to separate

Optional recognition exemptions • Short-term leases – Leases with lease term <12 months

• Low-value asset leases – Leased assets in order of magnitude of <$5,000 – Examples: laptops, office furniture, mobile phones

Lessee - measurement • Assets and liabilities measured on a present value basis • Lease payments – Those payable during non-cancellable period plus optional periods that the lessee is reasonably certain to exercise – Include fixed payments and inflation-linked payments – Exclude variable payments linked to future sales or use

• Discount rate – Rate in the contract or lessee’s incremental borrowing rate

Lessee - presentation Balance sheet • ROU assets together with PPE or as own line item • Lease liabilities in accordance with IAS 1 Profit and loss • Depreciation and interest reported as for any other asset and financing Cash flow statement • Principal within financing activities • Interest within either operating or financing activities (IAS 7 option)

Lessee - disclosure Quantitative disclosures • Breakdown of lease costs • Total lease cash flows • Maturity analysis of undiscounted commitments • Information about ROU assets by major class of leased asset

Entity-specific information • Additional information, if relevant • Extension and termination options • Variable lease payments • Residual value guarantees • Sale and leaseback

Lessee - transition Full retrospective

Modified retrospective Existing finance leases:  Carry forward IAS 17 asset & liability Existing operating leases:  No restatement of comparatives  Choice of measurement of ROU assets  Exemption for leases ending within 12 mths  Rely on onerous lease assessment

No reassessment of existing contracts (lease vs service) required

Convergence with the FASB

â&#x20AC;˘ In practice, little difference in profit or loss reported for many companies

IASB lessee model • Useful information – Most investors think leases create debt-like liabilities – Link between balance sheet and income statement important for analyses, eg return on capital

• Strong conceptual basis – All leases contain rights of use

• Cost and complexity – No difference in liability measurement – IASB model: – Can use fixed asset systems for lease asset – No lease classification

IASB vs FASB IASB

FASB –

FASB –

existing capital leases

existing operating leases

Balance sheet

Recognition

Measurement

Presentation

All leases on balance sheet







Exemption for ST leases







Exemption for low-value leases



---

---

Lease liabilities on a discounted basis

1

1

1

Initial lease asset = liability







Depreciation of lease assets

Typically straightline

Typically straightline

Typically increasing

Lease liabilities

Financial liabilities or separate line

Separate presentation

Separate presentation

Lease assets

1 Different reassessment of inflation-linked payments

PPE or separate line

IASB vs FASB IASB

FASB â&#x20AC;&#x201C; existing capital leases

FASB â&#x20AC;&#x201C; existing operating leases

Depreciation

Depreciation

Single expense

Interest

Interest

---

Income statement Operating costs Finance costs

Cash flow statement Operating activities

Interest1

Interest

Interest and principal

Financing activities

Principal

Principal

---

1 Under IFRS, interest payments can be presented within either operating or financing activities

Illustration—lessee accounting A company wants to lease a truck for a 4-year period. It considers two different lease structures: Lease 1—pay £60,000 in equal amounts over 4 years Lease 2—pay £53,000 at the end of year 1 Difference in total payments relates solely to difference in timing of payments. Both leases are operating leases under IAS 17.

Accounting over 4-year lease term

IASB model

FASB / IAS 17

Lease 1

Lease 2

Lease Asset—cost

£50,000

£50,000

Operating expense

£50,000

£50,000

Interest expense

£10,000

£3,000

Operating expense

€60,000

€53,000

Same expense reflecting use of an identical asset that costs the same amount in PV terms Higher operating profit

Benefit of separating interest exp.

• Many investors adjust the income statement using rough estimation techniques (eg interest = 1/3 rent expense, depreciation = 2/3 rent expense; or EBITDAR) • Estimated effects of IASB lessee model on operating profit: 1,022 listed companies1

Increase in operating profit margin %

45%

< 0.5%

19%

0.5—1%

32%

1—5%

3%

5—10%

1%

> 10%

(1) 1,022 IFRS/US GAAP listed entities (excluding banks and insurance companies) each with estimated operating lease liabilities of >$300M (discounted basis). Data obtained from financial data aggregators that may contain errors; this information should, therefore, be used with a degree of caution.

Subleases, Sale and leaseback • Subleases - Intermediate lessor – Account for head lease and sublease as two separate contracts – Classify a sublease with reference to the ROU asset arising from the head lease

• Sale and leaseback transactions – Sale must meet the requirements in IFRS 15 – Seller/lessee recognises only gain related to rights transferred – Adjustment made for off market terms

Lessor accounting • In essence, no change to existing lessor accounting • Feedback on 2013 ED – Existing lessor accounting is not broken – Concerns about cost and complexity

• Redeliberations: enhanced disclosures – Information about the residual value risk – Operating leases: separate disclosures for leased assets and assets used by a lessor for other than leasing

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