New lease accounting rules (ASC 842, IFRS 16) will dramatically increase companies’ reported liabilities
The value of operational leases can equal almost two-thirds of the size of the company balance sheet
Large, multinational companies across industry sectors currently rely on a huge variety of operational leases to finance assets, which keep leases and their associated liabilities off balance sheets
The cost of lease commitments that currently don’t sit on the balance sheet can be upwards of 62% of existing balance sheets, according to new analysis by Aptitude Software, a global financial software specialist.
The new lease accounting standards (ASC 842 and IFRS 16) come into force at the start of next year, fundamentally changing how companies account for leases. It can move thousands of leases onto a company’s books and requires CFOs to apply accounting judgment across thousands of leases.
Companies rely on a huge variety of leased assets including premises, land agreements, delivery vehicles, machinery and IT equipment; Aptitude Software’s analysis shows that these operational leases can equal a material percentage of companies’ total asset values.
Ross Chapman, Global Marketing Director, said: “Many investors, CEOs and business managers are on course to hit the unforeseen impacts of new lease accounting rules. The financial effects of the new rules are largely unknown as most companies have yet to implement systems that can deliver control and transparency over lease accounting.”
The following table looks at five leading multinational companies in each sector to calculate an average value of operational lease liabilities against total assets. Examples of the highest recorded lease liability known in each sector have also been highlighted.
|OPERATIONAL LEASE LIABILITIES VERSUS COMPANY NET ASSETS|
|Industry Sector||Average operational lease value as % of total assets (minus goodwill)||Average value of operational leases for observed companies
|Company example||Company example: Operational lease value as % of total assets (minus goodwill)||Company example: value of operational leases
|Oil & gas||6%||$10.6||Statoil||8%||$8.6|
|Consumer product goods (CPG)||8%||$1.7||L’Oréal||11%||$3.5|
|Telecommunications||11%||$20.4||Deutsche Telekom AG||13%||$18.6|
|Financial Services / Banking||1%||$8.0||Bank of America||1%||$13.6|
|Retail||31%||$16.2||Walgreens Boots Alliance||62%||$31.4|
Aptitude Software analysis of five well-known companies by industry, Jan 2018
Aptitude Software’s analysis shows that the total value of lease liabilities is only a small part of the issue when it comes to complying with the new standard. A wide variety of leasing arrangements complicate the compliance with new rules including intra-company lease transfers, sub-leasing and embedded options. Furthermore, US (ASC 842) and International (IFRS 16) lease accounting rules are distinctly different, challenging multinational companies to deliver multi-GAAP financial reporting.
Ross E. Chapman, added: “Whilst the new standard is summarized in just over 20 pages, it is deceptively complex. A very high level of judgment and consideration is needed to apply accounting consistently and appropriately across a diverse range of leasing arrangements. Whilst often out of sight, leased assets can be equivalent to an enormous proportion of a company’s value.”
“Some leading multi-nationals have realized that they were on course to hit a ‘leaseberg’ and have mobilized their teams to achieve compliance with new lease accounting capabilities. Many others, unfortunately, have not realized the real-world accounting challenges required to achieve compliance and gain control over the lease liabilities that will need to be managed on their balance sheets.”
The new lease accounting standard fundamentally changes accounting for lease transactions and will move hundreds or thousands of lease contracts onto a company’s books. All leases over $5,000 need to be disclosed. For global companies, leased assets need to be accounted for consistently regardless of where assets are stored. Some companies have reported that the new lease accounting standard will necessitate 66 times more journal entries than were previously required.
Jeremy Suddards, Aptitude Software Chief Revenue Officer, added: “The new leasing standards are an accounting nightmare. A global technology brand recently approached us with over $2 billion of operating leases. Applying the new accounting standard was going to have a huge impact on their business and they needed to understand exactly how new rules would affect their financial position.”
“After a series of mergers and acquisitions, this business has multiple ledgers and numerous different lease management systems. With over 50 entities around the world, the combination of multiple currencies, embedded equipment leases and other complex arrangements made achieving compliance and gaining control of lease accounting a priority.”
Aptitude’s Leaseberg Index combines available data on the value of lease liabilities with sector specific insights to estimate the overall challenge across key industries.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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