Occupier Edge_Ed.5_US_1110

Cushman & Wakefield Launches Interactive Lease Accounting Calculator

FINANCE

NEW LEASE ACCOUNTING RULES The new lease accounting rules will fundamentally change the way leases are recognized on a company’s financial statements. For companies that report under International Financial Reporting Standards (i.e. non U.S. companies), the new rules apply from 2019. For U.S. companies, the introduction of the new U.S. GAAP rules is being phased in with public companies adopting in 2019 and private organizations in 2020.

PROFIT & LOSS CHANGES The Profit & Loss (Income Statement) is where the new IFRS and U.S. GAAP standards differ.

These new rules will impact all future leasing decisions such as acquisitions, renewals and re-gears, so it is important that everyone is aware of these changes. BALANCE SHEET CHANGES From a Balance Sheet perspective, the treatment of leases under the new IFRS and U.S. GAAP standards is similar. In future, all leases will appear ‘on-Balance Sheet’ as an Asset and Liability. On implementation, Balance Sheets will balloon and companies will appear to have a greater asset base with higher levels of debt.

U.S. GAAP Topic 842 – Dual model Companies will need to classify their leases as:

• Finance Lease: Similar P&L (Income Statement) treatment to IFRS 16.

• Operating Lease: Straight-lined lease expense is recorded as a single line in operating expenses in the P&L Under the new U.S. GAAP standard, the existing Finance Lease / Operating Lease treatment for the P&L has been retained. As the majority of real estate leases will be classified as ‘Operating Leases’ under the new U.S. GAAP standard, the Profit & Loss will continue to be the same as the rent paid. IFRS 16 – Single model For companies that report under IFRS (i.e. Non- U.S. companies), the Profit & Loss will no longer equal the rent paid under the lease. Instead, lease payments will be split into:

Current Standard IAS 17 / US GAAP

New Standard IFRS 16 / Topic 842

Finance Leases

Operating Leases

All Leases

-

Assets

£ $ €

-

£ $ €

Liabilities

Off Balance Sheet Obligations

Balance Sheet Impact

• Amortization – Recognized on a straight- line basis over the lease term

300 400 500 600 700 200 100 0 800 900

• Interest – Front loaded at the start of the lease

The Profit & Loss will be higher than rent at the start of the lease. The P&L will reduce over the course of the lease term due to the lower interest charge. Companies will be seeking to minimize the ‘P&L spike’ at the start of the lease wherever possible by seeking shorter, more flexible lease terms.

Thousands USD

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

RoU Asset

Lease Liability

54 The Occupier Edge