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IFRS 16 – the commercial impact on retailers and how to plan for it

IFRS 16 – the commercial impact on retailers and how to plan for it

24 Jul 2017

Martin Firbank, Head of Retail at PKF Cooper Parry, looks at the commercial impact of IFRS 16 on retailers and how to plan for it

If you work for a retailer you’ll probably do a lot of leasing; stores, offices, distribution centres, machinery, vehicles and so on.  And this means the new accounting standard, IFRS 16 is going to have a huge impact on your business.

So, what are the changes?

From 2019 (if you report under IFRS) or 2022 (for new UK GAAP – FRS 102 reporters), IFRS 16 means all leases will be brought onto the balance sheet. Its aim is to make everything much more transparent, which could fundamentally change the way your financial statements look.

All leases – apart from short term and low value arrangements – will be treated in the same way:

  • Operating leases will be brought onto the balance sheet (as an asset or liability at present value)
  • Rental costs will be replaced by depreciation and interest charges in the income statement
  • Your cash flow statement will look different

And what are the things likely to be affected?

KPIs are likely to be affected.  EBITDA will generally increase. And other measures such as net debt, gearing and return on capital could also change. 

Financial covenants, performance related bonuses, dividend policies and acquisition transactions will be impacted.

It’s important you don’t lose sight of understanding the effect on your tax position too.

Managing the change smoothly

While these changes may influence business decisions about entering lease arrangements, including your ‘lease v buy’ strategy, how you manage change is key to a smooth transition:

  • Understand the impact early and involve the right people across the business to make fully informed decisions, communicate with stakeholders and ensure that sufficient resources are available is very important. You should be involving your finance, property, tax, procurement, legal and logistics teams.
  • Put in robust systems, software and processes to pull together, standardise, validate, update and maintain the relevant information from the leases so that calculations can made, disclosures prepared and regular reassessments made.
  • Make the best judgements for your business – there’ll be several judgement areas when preparing the calculations, including leases with variable payment terms, break and extension clauses, and service elements, and deciding on the discount rate to use.

What to do next

Firstly, we’re telling all the businesses and retailers we work with not to underestimate this challenge. Follow the tips in this blog, involve the right people and tackle this early.

For more information and to see how we can help, please contact Martin at martinf@pkfcooperparry.com

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