IFRS 16 Leases

Your journey to implementation

22 June 2017
Introduction

Nick Chandler Almudena Cossio Ian Greenwood

Partner Senior Manager Senior Manager
Head of Accounting Advisory Services Accounting Advisory Services Accounting Advisory Services
+ 44 (0)20 7311 4443 + 44 (0)20 7694 3482 + 44 (0)20 7694 4926
nick.chandler@kpmg.co.uk almudena.cossio@kpmg.co.uk ian.greenwood@kpmg.co.uk

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 2
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

IFRS 16 Leases your journey to implementation
Now
Key accounting Impact
Understand
judgements & policies assessment
IFRS 16
Gov e rnance and com m unication

System Data
Processes solution collection

Compliance
Business as usual

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 3
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

IFRS 16 Leases your journey to implementation
Now
Key accounting Impact
Understand
judgements & policies assessment
IFRS 16
Gov e rnance and com m unication

System Data
Processes solution collection

Compliance
Business as usual

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 4
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Understand IFRS 16
Lessees face major changes
Impact on P&L, B/S and financial ratios
from 1st January 2019

Companies with operating leases will appear to be

more asset-rich, but also more heavily indebted.
The P&L expense will be higher at the beginning
of the lease.
Profit/loss Balance sheet Ratios

EBITDA Total Gearing

assets

EPS Net assets Interest cover

(in early Asset turnover
years)
ROCE
Asset Liability Depreciation
cash rental payments

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 5
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Understand IFRS 16 broader business impacts
Systems
Leasing database
System solution
ERP integration Finance
Foreign exchange
Retranslations of lease Transition options
liability Data collection
Data collection in foreign Tax
locations KPIs
IFRS 16
Accounting change
Strategy
Investor relations
Lease vs buy
Analyst queries
Sub-leases
KPIs (e.g. EPS)
Lease structuring
Credit rating
Sale and leasebacks
Employee benefits
Management remuneration
KPIs

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 6
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

IFRS 16 Leases your journey to implementation
Now
Key accounting Impact
Understand
judgements & policies assessment
IFRS 16
Gov e rnance and com m unication

System Data
Processes solution collection

Compliance
Business as usual

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 7
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Key accounting judgements and policies
Identify key lease
accounting Lease definition Leases of low value Short term leases
judgements and
policies to be Fixed or in-substance
Lease term Variable payments
determined and fixed payments
documented
Discount rates Re-assessment Modifications

Sub-leases Impairment Provisions

Educate staff across

your organisation
with different Treasury Real Estate
backgrounds
Tax IT

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 8
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Key accounting judgements
Lease definition
Is it a lease or a service? Is there an embedded lease?

Discount rate Variable payments

Incremental borrowing rate? Those based on usage are excluded

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 9
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Key accounting judgements
Lease term
What is reasonably certain?

Extension period customer Termination period

Rent-free
Main lease period is reasonably certain to customer is reasonably
period
exercise certain not to exercise

Lease term

Low-value exemption Short-term lease

Where do you draw the line - 5,000? Reasonably certain term less than 12 months?

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 10
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Transition to IFRS 16
Transition Approach 31 December 2018 31 December 2019 Date of equity
comparative period adjustment

Retrospective IFRS 16* IFRS 16 1 January 2018

Modified
retrospective IAS 17 IFRS 16 1 January 2019
(Option 1 & 2)

Fully retrospective Modified retrospective

IFRS 16 applied from Liability measured using remaining

inception of lease term & appropriate discount rate
Two options to apply this approach,
Cost Cost on a lease by lease basis:
Asset = liability
Asset recalculated
Comparability Comparability

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 11
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

IFRS 16 Leases your journey to implementation
Now
Key accounting Impact
Understand
judgements & policies assessment
IFRS 16
Gov e rnance and com m unication

System Data
Processes solution collection

Compliance
Business as usual

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 12
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Impact assessment modelling transition options
B/S asset on transition

P&L expense under each option

B/S liability on transition

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 13
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

IFRS 16 Leases your journey to implementation
Now
Key accounting Impact
Understand
judgements & policies assessment
IFRS 16
Gov e rnance and com m unication

System Data
Processes solution collection

Compliance
Business as usual

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 14
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Data collection
Duration
Objective: obtain Payments
all required data Rent review dates
Contract periods
Additional terms

Challenges

Significant, time-intensive undertaking where large

lease portfolios are held
Challenges resourcing large-scale lease reviews Choice in approach
Foreign language / currency leases
Manual data extraction
Local legal characteristics
Cognitive system solution
Lease data held on legacy systems
Physical location of lease documentation
Availability of sufficient documentation for analysis
Complex lease terms

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 15
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

IFRS 16 Leases your journey to implementation
Now
Key accounting Impact
Understand
judgements & policies assessment
IFRS 16
Gov e rnance and com m unication

System Data
Processes solution collection

Compliance
Business as usual

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 16
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

System solution
Existing database(s) and/or leasing system(s) KPMG Leasing tool (KLT) is a cloud-
based, pre-packaged KPMG solution
that enables clients to meet the
Existing lease info Existing lease info Existing lease info Existing lease info
requirements under the new leasing
(System A) (System B) (Excel) (Access DB) standard.

Accounting Schedules

Data and
Electronic
Systems Transfer
System Quantitativ e disclosures

Manual
Solution
Input
Financial
Reports

Electronic
Transfer

Integrate with current financial reporting

systems (e.g., AP system, ERP system, etc.)

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 17
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

IFRS 16 Leases your journey to implementation
Now
Key accounting Impact
Understand
judgements & policies assessment
IFRS 16
Governance and communication

System Data
Processes solution collection

Compliance
Business as usual

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 18
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Processes
Ensure processes are in place to capture and
assess new lease data
Maintain control
over who can
Approval of new lease arrangements bring debt onto
the balance sheet!
Finance signoff of proposed lease terms
New leases Process for inputting lease data into system
Calculation of discount rates
Variable payments e.g. CPI indexation

Monitoring of lease renewals / rent reviews

Lease Re-establishing lease liability
modifications
Recalculation of discount rates

Embed processes beyond finance

Treasury Tax Real estate IT

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 19
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

IFRS 16 Leases your journey to implementation
Now
Key accounting Impact
Understand
judgements & policies assessment
IFRS 16
Governance and communication

System Data
Processes solution collection

Compliance
Business as usual

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 20
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Governance and communication
Project steering committee

Board engagement

IFRS 16 work streams

Accounting, Other
Report to Project Data and Risk and Change and
Reporting and Business
Board/ Management Systems Controls Engage
Analysis Impacts
Finance
Leadership

Identify stakeholders
Start
thinking
Communicate expected impacts

Allow sufficient time to get accustomed to new look B/S and P&L

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 21
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

Wrap-up
What action should you be taking now? Resources

Set up IFRS 16 project governance Go to:

www.kpmg.com/IFRS

Communicate
stakeholders
implementation plan to

Educate core project team

Perform impact assessment
Identify key judgements and accounting policies
Start thinking about data collection and systems
solutions

2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affilia ted with KPMG International Cooperative (KPMG International), a 22
Swiss entity. All rights reserved.

Document Classification: KPMG Confidential

The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should ac t on
such information without appropriate professional advice after a thorough examination of the particular situation
2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Produced by CREATE | CRT083053A | June 2017