IFRS 16 creates £96m hit on balance sheet for construction lease company
13 Feb 2019
Ramirent, a construction equipment leasing company based in Finland, has revealed that adopting IFRS 16 Leases will increase its net debt by 31% (€109m) from €350.6m (£307.8m) to €459.3m in 2018
13 Feb 2019
The company’s financial target for net debt/EBITDA ratio has been changed from below 2.5x to below 2.8x at the end of each fiscal year to reflect the impact of IFRS 16 adoption.
Ramirent adopted IFRS 16 from 1 January 2019, using the modified retrospective approach, which does not require restatement of the comparative periods.
As well as impact on debt, IFRS 16 will also increase EBITDA by €31m from €202.9m to €233.77m.
Ramirent, which specialise in leasing high value construction equipment, has non-cancellable operating lease commitments of €88m, with the company estimating that approximately 1-5% of these relate to payments for short-term and low value leases which will not be capitalised but recognised on a straight-line basis as an expense in profit or loss.
As the short-term premises lease contracts as well as premises lease agreements with indefinite term and short termination period are included in the calculation of the right-of-use asset, the total amount to be capitalised will be higher than the current off balance lease commitment.
According to the company’s impact analysis the amount to be capitalised as a right-of-use asset and a lease liability at the transition on 1 January 2019 will total approximately €110m.
Ramirent’s half year results are due to be published on 31 July 2019.
FTSE-250 listed Regus, which leases office space globally, has warned about the implementation of IFRS 16.
From 1 January 2019, real estate leases, including office spaces, will need to be accounted for on balance sheets. In its annual report for 2017 the company said: ‘Under exemptions, companies may opt to move to shorter lease terms or outsource office spaces to serviced providers instead, as these would not need to be, in general, accounted for on balance sheets, helping to reduce the administrative burden.’
In its 2017 accounts the company said that it completed an initial assessment of the potential impact of IFRS 16 on it consolidated financial statements but had not completed its detailed assessment. Regus said: ‘The actual impact of applying IFRS 16 on the financial statements in the period of initial application will depend on future economic conditions, including the group’s borrowing rate at 1 January 2019, the composition of the group’s lease portfolio at that date, the group’s assessment of whether it will exercise any lease renewal options and the extent to which the group chooses to use practical measures and recognition exemptions.’
The largest expected impact will be on the company’s right-of-use asset and related lease liability the group will recognise for its leases in respect of its global network, which will be further dependant on the transition method adopted.
Regus’ annual report and accounts for 2018 is expected at the end of April.
Paris-based multinational media conglomerate Lagardère has estimated that adopting IFRS 16 will decrease its profits in 2018 by €14m, with depreciation of right-of-use asset costing €471m.
Right-of-use assets are expected to increase to €2.4bn of which €1.9bn are concession stores and €541m are buildings and other property. This is because IFRS 16 provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases on its balance sheet unless the lease term is 12 months or less or the underlying asset has a value below $5,000.
Lagardère will release its full-year 2018 results without application of IFRS 16 on 13 March 2019. On 25 July 2019 the company will release its first-half 2019 results under IFRS 16.
Report by Amy Austin