Moody's: Impact of IFRS 16 on companies' accounts difficult to measure

26-Jul-2018

A number of factors, including the possibility that some existing "leases" may not be seen as leases under the new guidelines, make the impact of the fast-approaching International Financial Reporting Standard 16 (IFRS 16) tricky to gauge, says Moody's Investors Service in a report published today.

IFRS 16 requires all EMEA companies reporting under IFRS to bring off-balance-sheet leases onto their balance sheets for periods commencing on or after 1 January 2019.

Trevor Pijper, vice president -- senior credit officer at Moody's, said:

"IFRS 16's impact on company accounts is difficult to judge as a result of new guidance designed to determine whether a contract is a lease or not. For example, ITV's future lease payments shrank 72% after it decided transmission supply agreements previously recorded as leases did not actually meet the definition."

Several other factors could also mask the estimated impact of IFRS 16. For example, certain leases may, under the new guidance, have a different duration to the term currently intimated. After adopting IFRS 16 early, Play Communications S.A. (Ba3 stable) revealed a future cash outflow for leases at end-2015 that was 141% higher than the amount disclosed under IAS 17.

Under IFRS 16, free cash flow will also be higher unless the company revises its definition of the metric. For example, Deutsche Post AG (A3 stable) decided to amend its definition to include the repayment of lease liabilities (€398m) and interest paid on lease liabilities (€89m) after early adoption of IFRS 16 resulted in a €487m addition to operating cash flow (before interest paid) in the first three months of 2018.

Other factors include the impact of the chosen transition option on the measurement of the lease liability, and the exclusion of some amounts payable by the lessee from the lease liability reported on the balance sheet.

Moody's report, "Non-financial companies -- EMEA: What to look out for with IFRS 16, the new accounting standard for leases," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.