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Cushman & Wakefield Launches Interactive Lease Accounting Calculator
NEW LEASE ACCOUNTING RULES The new lease accounting rules will fundamentally change the way leases are recognised 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 organisations in 2020.
PROFIT & LOSS CHANGES The Profit & Loss (Income Statement) is where the new IFRS and U.S. GAAP standards differ. U.S. GAAP Topic 842 – Dual model Companies will need to classify their leases as:
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.
• 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
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£ $ €
Off Balance Sheet Obligations
• Amortisation – Recognised on a straight-line basis over the lease term
Balance Sheet Impact
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 minimise the ‘P&L spike’ at the start of the lease wherever possible by seeking shorter, more flexible lease terms.
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