Lease accounting 2019 IFRS and US GAAP Preparing for a smooth landing

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Bathsheba Holt
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1 Lease accounting 2019 IFRS and US GAAP Preparing for a smooth landing What s next? Q4 2017

Summary As you may already be aware, the accounting standards for lease accounting will change. This means that many leasing customers must recognise existing operating leases on their balance sheet.

2 Summary As you may already be aware, the accounting standards for lease accounting will change. This means that many leasing customers must recognise existing operating leases on their balance sheet. Although the standards will not become effective until 2019, we are writing to advise you to start considering its implications sooner rather than later, insofar as you have not done so already. At LeasePlan, we are actively working to make this transition as smooth as possible for you. We have set up a dedicated project team to ensure that necessary data will be made available to you in a timely manner and to provide guidance to fleet managers and financial professionals alike. This white paper describes the changes versus today, how these changes will impact you and what LeasePlan will do to support you in all this. 2

Index Summary Lease Accounting 2019 preparing for a smooth landing 2 What will change? New lease accounting standards 4 How do the changes impact the lessee?

3 Index Summary Lease Accounting 2019 preparing for a smooth landing 2 What will change? New lease accounting standards 4 How do the changes impact the lessee? Impact on financial ratios 6 Administrative burden 6 What does LeasePlan do to support the lessee? Contract data 7 Portfolio approach 8 Operational leasing remains attractive Advantages of leasing 9 LeasePlan is there for you 9 3

4 What will change? New lease accounting standards Aimed at improving transparency and comparability between companies that lease and buy their assets, in January 2016, the International Accounting Standards Board (IASB) issued IFRS16 Leases. One month later, the US Financial Accounting Standards Board (FASB) issued their new US GAAP standard ASC Leases (Topic 842). Both standards realise their long-standing goal of bringing leases on-balance for lessees (the entities that obtain the right to use an asset in exchange for a consideration). The standards apply to all companies reporting under IFRS or US GAAP, so mainly the listed companies. It concerns the leases of tangible fixed assets, including vehicles. Under the new rules companies that report under IFRS or US GAAP will be required to recognise a right to use a vehicle and a liability to make lease payments on their balance sheet. Besides this change on the balance sheet, companies will also see a classification change on their income statement, recognising depreciation and interest for operating leases rather than a lease expense. Under US GAAP lease accounting, the income statement will remain the same as is today with a straight-line lease expense. The table on the next page gives an overview of the most important changes. 4

5 Key facts Topic Current standards (IAS-17 and US GAAP - ASC840) New standard IFRS-16 New standard US GAAP - ASC842 Lease Accounting Balance sheet Finance leases on-balance Operating leases off-balance All leases on-balance All leases on-balance Lease Accounting Income statement Finance leases: depreciation and interest expense Operating leases: lease expense All leases: depreciation and interest expense Finance leases: depreciation and interest expense Operating leases: lease expense Practical expedients/exemptions Portfolio approach Recognise total lease term (including services) Short term leases Low value leases (< $5.000) Portfolio approach Recognise total lease term (including services) Short term leases Effective date January 1, 2019 Full or modified retrospective transition December 15, 2018 Modified retrospective transition 5

6 How do the changes impact the lessee? Impact on financial ratios The new standards will have an impact on a number of key financial ratios, both positive as well as negative. For example, the EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) will be affected positively since operating expenses are replaced by capital expenses. On the other hand, solvency and leverage ratios will be impacted negatively since the asset value increases while equity remains unchanged. Financial impact Small ticket leases Low Big ticket leases High Furthermore, the new standards may have tax impacts. Depending on jurisdiction and the lessee s approach towards deferred tax accounting, deferred tax balances may arise and/ or the effective tax rate may be impacted. Having said this, the largest financial impact is expected from property and large asset leases such as aircraft while vehicle leases will have a relatively small financial impact. Administrative burden High Low 6

Administrative burden As is the case with the introduction of any new rule, the new lease accounting standard will initially lead to a higher administrative burden.

In contrast, most companies leased real estate (only a limited number of hardly changing long-term contracts) will require much less handling while having a much larger asset value.

7 Administrative burden As is the case with the introduction of any new rule, the new lease accounting standard will initially lead to a higher administrative burden. The high administrative burden is particularly the case for high volume and frequently changing or renewing leases such as vehicle leases. In contrast, most companies leased real estate (only a limited number of hardly changing long-term contracts) will require much less handling while having a much larger asset value. Recognising leases on your balance sheet may initially require substantial effort to identify all lease agreements and extract all relevant lease data necessary to apply the standard. However, once implemented, LeasePlan believes these new rules will become business as usual. Although the new IFRS requirements do not come into force until 1 January 2019 (15 December 2018 for US GAAP), we do recommend to start thinking about the necessary adaptations to your accounting policies, data management, processes and IT systems in order to comply. Such projects always take time amidst undoubtedly many other priorities. 7

8 Name Example What does LeasePlan do to support the lessee? Contract number Contract start date Contract end date Duration in months Currency EUR Monthly lease component 288,85 Monthly non-lease component 283,79 Contract data As you have come to expect from the global leader in fleet management and driver mobility, at LeasePlan we are taking a proactive approach to help you implement the new standards as efficiently as possible. Our international, multidisciplinary LeasePlan project team is there to facilitate a smooth transition for our customers. LeasePlan experts are available to provide both fleet managers and financial professionals with information, guidance and advice. We at LeasePlan provide support to minimise the administrative burden of applying the new lease standards to automotive leases. LeasePlan will provide you data of each of your lease contracts, necessary to apply the new rules. The data will be available on a monthly basis, both on global as well as on local level and it is well structured and ready for upload into your lease accounting software. Our aim is for you to be well equipped with all relevant data to implement the change with minimal disruption to your business. See on the left a sample of the most important data fields. Monthly lease instalment 572,64 8

not differ materially from the individual leases approach. In cooperation with one of the big four accounting firms, LeasePlan developed a methodology for application of such portfolio approach.

9 Portfolio approach Both standards specify the accounting for an individual lease. However, as a practical expedient, the lessee may apply the standards to a portfolio of leases with similar characteristics if it reasonably expects that the effects on the financial statements would not differ materially from the individual leases approach. In cooperation with one of the big four accounting firms, LeasePlan developed a methodology for application of such portfolio approach. By grouping the leases into portfolios with similar lease payment and duration, accounting can be simplified and done per portfolio rather than per individual lease. This will significantly reduce the administrative burden of your accounting process, especially since vehicle leases are typically high in volume and frequently changing. 9

Operational leasing remains attractive Advantages of leasing Even under the new lease accounting rules, operational leasing will remain attractive.

10 Operational leasing remains attractive Advantages of leasing Even under the new lease accounting rules, operational leasing will remain attractive. After all, the amounts capitalised for lease contracts will still be significantly lower than under outright ownership of the vehicles. In addition, you will continue to benefit from: Greater liquidity thanks to not having capital tied up in vehicles Outsourcing of a non-core activity; allowing you to focus on your core business Predictable mobility costs, meaning reliable budgeting and forecasting Avoidance of residual value and maintenance risk Operational flexibility: leasing rather than owning vehicles means that you can adjust your mobility needs to suit the scale and focus of your organisation Efficient administration and maintenance as well as other services, e.g. driver services, roadside assistance, communication, etc. LeasePlan is there for you For more information on the new Lease accounting standards and how LeasePlan can support in the implementation, whether it be lease by lease accounting, portfolio approach, impact analyses or any other issue, please us on leaseaccounting@leaseplan.com. 10

11 LeasePlan Corporation N.V. Gustav Mahlerlaan ME Amsterdam The Netherlands leaseplan.com

Why IFRS 16 matters to the shipping industry

www.pwc.no Why IFRS 16 matters to the shipping industry October 2017 Executive summary New lease standard to be effective 1 January 2019. Early implementation permitted together with IFRS 15 (effective