The new lease accounting standard will greatly impact the accounting for lease transactions. This will encompass significant business implications for retail.
Under IFRS16 almost all leases will be recognised on the balance sheet, with a right-of-use asset and financial liability that recognise more expenses in profit or loss during the earlier life of a lease. This will have an associated impact on key accounting metrics which will largely affect the retail industry.
The retail industry is likely to be one of the most affected by the new standard, given the significant use of rented premises for their stores. The PwC Global Lease Capitalisation study indicated that there would be a median debt increase of 98% for retailers, and 41% median increase in EBITDA.
In retail leases are in the form of medium term leases (generally 3-5-9 years), whether in premium locations (flasgship stores), shopping centres or ordinary outlets. Such leases typically offer renewal options, and often involve variable rentals. This variability is commonly due to inflation adjustments and contingent rentals in some locations where the property owner has a vested interest in the performance of the business (e.g. airports, and shop-in-shop arrangements).
Historically leases have been considered as operating leases, and have not therefore had any impact on the balance sheet. The amount recorded in the income statement was typically on a straight line basis and entirely included in operating expenses. Now they will be on balance sheet.
The new lease standard will not only have an impact on the balance sheet, but also on the operating costs, with a split of the expense between operating and finance costs. The exemption for short-term leases and small assets is unlikely to provide any significant relief to retailers.
For more information about the impact of the IFRS 16 lease accounting changes on the Retail Industry download now our free PDF here:
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