«Sind Sie bereit? Noch 15 Monate bis zur Umsetzung des neuen IFRS-Standards zur Bilanzierung von Mietverträgen.» Guten Morgen und herzlich willkommen!
Kirsten Rust Head Tenant and Landlord Representation
Paul Fry MRICS MCR Partner, Occupier Finance bei Cushman & Wakefield
A new era for lease accounting: Are you ready?
Agenda 1. The Need for Change 2. The Future of Lease Accounting 3. Impacts on Financial Reporting 4. New definition of a Lease The need for change 5. Implementation and Implications for CRE 6. Transitional Approaches 7. Impacts on CRE Strategy 8. Impacts on Industry Sectors 5
The Need for Change How are leases currently recognised? Finance leases Operating leases Why the need for change? Lack of transparency Lack of comparability How are these issues being addressed? IASB and FASB joint project 2 new standards: 1.IASB published IFRS 16 in Jan 2016 2.FASB published standard in Feb 2016 $3.3tn lease commitments 85% operating leases 1 in 2 companies impacted Change is coming January 2019 6
The Future of Lease Accounting: Balance Sheet Current Standard IAS 17 / US GAAP New Standard IFRS 16 / US GAAP Finance Leases Operating Leases All Leases Assets - Liabilities $ - $ Off Balance Sheet Obligations Exclusions: 1) Short term leases <1 year 2) Low value leases, assets <$5,000 7
The Future of Lease Accounting: P&L Current Standard IAS 17 New Standard IFRS 16 Finance Leases Operating Leases All Leases Operating Costs - $ - Depreciation / Amortisation $ - $ Finance Costs $ - $ Current Standard US GAAP New Standard US GAAP Finance Leases Operating Leases Type A Leases Type B Leases Operating Costs - $ - $ Depreciation / Amortisation $ - $ - Finance Costs $ - $ - 8
Impacts on financial reporting: Balance Sheet All leases result in: 1. Right-of-use asset 2. Lease liability Equal at lease start. Calculated as PV of future lease payments. Assets Liabilities Equity '000 800 700 600 500 400 300 200 100 0 Balance Sheet Impact: Opening Balance 1 2 3 4 5 6 7 8 9 10 Year Asset Liability All leases reported on Balance Sheet 9
Impacts on financial reporting: P&L All leases result in: 1. Amortisation 2. Interest payment 140 120 100 P&L Impact Front-loaded expense over first half of lease term. EBITDA Profit before Tax '000 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 Year Amortisation Interest Cash Payment At lease start, P&L impact > rent payment 10
New definition of a Lease A CONTRACT IS (OR CONTAINS) A LEASE: If the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Identified asset? NO YES Customer obtains all economic benefits from use? NO YES YES Customer directs use? NO Lease No Lease 11
Implementation and implications for CRE: Data On day 1 lessee will need to determine: Non-cancellable lease term Discount rate Unavoidable future lease payments Requires judgement to determine IBR or IRR? Depends on lease terms Perfect property data is the starting point 12
Implementation and implications for CRE: Non-cancellable lease term Impact on day 1 depends on the lease term. 0 5 10 20 20-year term, 5-year break Year 1 Asset / Liability: 421k Year 1 P&L: 110k 20-year fixed term Year 1 Asset / Liability: 1,147k Year 1 P&L: 126k 10-year term, 10-year extension option Year 1 Asset / Liability: 736k Year 1 P&L: 118k Longer lease term = greater P&L impact 13
Implementation and implications for CRE: Discount Rate Two approaches to discount rate. Rate implicit in the lease Valuation exercise to determine market inputs Includes consideration of lessor s costs Includes consideration of residual value to the lessor Incremental Borrowing Rate Rate for equivalent financing Includes consideration of type of underlying asset Property yield may be used as a proxy Choices impact B/S and P&L 14
Implementation and implications for CRE: Future lease payments P&L impact on day 1 depends on rent review mechanism. 5 yearly RR CPI indexation Fixed uplifts 000 140 120 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 140 120 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 140 120 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 Day 1 P&L impact Cash Payment + Lower P&L impact - Reassess at RR + Lower P&L impact - Reassess at indexation + Higher P&L impact - No reassessment Balancing P&L impact vs admin burden 15
Implementation and implications for CRE: Future lease payments Liability is lower Liability is higher Turnover Rent 80k base rent + 20k turnover rent 1 = 100k cash payment Day 1 liability = 589k Fixed Rent 100k fixed rent 1 = 100k cash payment Day 1 liability = 736k Turnover rent = lower liability 16
Implementation and implications for CRE: Future lease payments Upfront incentives Smaller day 1 P&L Blended incentives Greater day 1 P&L 000 120 100 80 60 40 20-3 year rent free 1 2 3 4 5 6 7 8 9 10 Day 1 P&L = 75k Day 1 Liability = 670k 120 100 80 60 40 20 - Equivalent rent reduction 1 2 3 4 5 6 7 8 9 10 Day 1 P&L = 82k Day 1 Liability = 736k P&L Imapct impact Cash payment P&L Imapct impact Cash payment Upfront incentives = smaller B/S and P&L 17
Transitional Approaches IFRS 16 Single approach all leases A Full Retrospective Approach B Modified Retrospective Approach Determine on lease by lease Yes Can the Rate Implicit in the Lease be calculated? Use Rate Implicit in the Lease No Use Incremental Borrowing Rate Yes Is historic information available? 1 2 3 4 Use Incremental Borrowing Rate No Use Incremental Borrowing Rate Notes Liability and Asset measured as if IFRS 16 was applied since Lease Start Requires historic data and is costly to apply Lowest Asset, Liability and P&L across all Options Liability measured as if lease starts in Jan 2019 Asset measured as if IFRS had been applied since lease start Requires historic data Lower Asset and P&L than Option 4 Liability and Asset measured as if lease starts in Jan 2019 No historic data needed Highest Asset and P&L Choices impact B/S and P&L 18
Transitional Options Cushman & Wakefield Track Record BALANCE SHEET IMPACT BALANCE SHEET IMPACT 25% typical reduction to Asset achievable based on optimising transition options 15% typical reduction to Liability achievable based on optimising transition options. P&L IMPACT ANALYSIS UNDERTAKEN >3,500 leases analysed 10% typical reduction to P&L achievable based on optimising transition options 900m annual rent expenditure 19
Impacts on CRE: Own vs Lease Strategy Owning and leasing to have similar impacts: Practical benefits of leasing assets remain: Assets Owned Property Leased Property Liabilities $ $ Effective deployment of capital Operational flexibility Regular, fixed lease payments Reduced residual risk Alternative source of finance To lease or not to lease? 20
Impacts on CRE: Sale & Leasebacks Recognition of Sale and Leasebacks is changing. Pre-Jan 2019 Post-Jan 2019 Off Balance Sheet financing Profit recognition Effective deployment of capital Alternative source of finance Source of long term finance Now is the time for Sale & Leasebacks! 21
Impacts on Industry Sectors Airlines Retailers Travel & Leisure Transport Telecomms Energy Media Distributors IT Healthcare Tesco s net debt to increase 17.6bn 8.6bn What s the impact on your business? 22
Contacts Paul Fry Partner, Occupier Finance Strategic Consulting EMEA Tel: +44 20 3296 3178 paul.fry@cushwake.com Cushman & Wakefield Copyright 2017
Auf Wiedersehen am SPGIntercityTALK vom 9. November 2017
LEASE ACCOUNTING The clock is ticking. Are you on track for IFRS 16 implementation? 2017 Actions 2018 Actions 2 5 7 1 3 4 6 VALIDATE EXISTING LEASED PORTFOLIO How many leases? What type of leases? What is the significance of real estate leases? Do other contracts now fall within the definition of a lease? How many leases expire post IFRS 16 implementation? FINANCIAL IMPACT ASSESSMENT Determine impact on Balance Sheet Determine impact on P&L Determine impact on key financial metrics DETERMINE PREFERRED TRANSITIONAL OPTION Undertake cost v benefit analysis of options Decide between Full Retrospective and Modified Retrospective Approach Determine implementation date (2018/2019) COLLATE RELEVANT DATA Audit existing lease data to identify gaps Update data and fill gaps IDENTIFY PREFERRED TECHNOLOGY SOLUTION Assess readiness of existing lease administration platform(s) Determine future technology requirements Identify and implement preferred technology solution IMPLEMENT Update business policies / processes Train affected staff Test solution Undertake dual reporting for existing leases prior to official implementation Embed as business as usual Determine applicable discount rates REVIEW CORPORATE REAL ESTATE STRATEGY Reassess own v lease policy Determine optimum leasing strategy Revisit surplus property strategy For more information on changes to lease accounting under IFRS contact: PAUL FRY Partner Occupier Finance Strategic Consulting EMEA Tel: +44 (0) 20 3296 3178 Paul.Fry@cushwake.com HANNAH COLEMAN Associate Occupier Finance Strategic Consulting EMEA Tel: +44 (0) 20 3296 3102 Hannah.Coleman@cushwake.com LAURA ZAVALA Senior Analyst Occupier Finance Strategic Consulting EMEA Tel: +44 (0) 20 3296 3530 Laura.Zavala@cushwake.com For further information on related Cushman & Wakefield services contact: PETER HULME Partner Occupier Management EMEA Global Occupier Services Tel: +44 (0) 20 3296 3780 Peter.Hulme@cushwake.com JEREMY WHITE Partner EMEA I.T. Director, Global Occupier Services Tel: +44 203 296 4680 Jeremy.White@cushwake.com VISIT OUR SITE: www.cushmanwakefield.com/leaseaccounting