IFRS 16 set to pull £180bn onto FTSE 350 balance sheets

Royal Dutch Shell, BP, Sainsbury’s, Vodafone and International Airlines Group head the ranking of FTSE 350 companies whose balance sheets are set to be most impacted by the new IFRS 16 lease accounting standard, according to analysis by accounting software specialist LeaseAccelerator

Its research suggests that collectively, the top 350 listed companies in the UK have £180bn in operating lease liabilities which will now need to be reflected in their financial reporting, with the highest concentrations in the energy, airline, retail, telecoms and financial sectors.

LeaseAccelerator’s analysis suggests oil and gas giants Royal Dutch Shell (£18.3bn) and BP (£10.9bn) have the highest operating lease obligations according to their most recent annual reports.

In third place in the rankings is Sainsbury’s (£10bn), followed by Vodafone (£8.6bn) and International Airlines Group (£6.8bn).

The new lease accounting standards change the way listed companies will report leases in their quarterly and annual financial statements. Many real estate and equipment leases, previously only disclosed in the footnotes of investor filings will now be capitalised on corporate balance sheets.

IFRS 16 takes effect from 1 January 2019 and estimates from the International Accounting Standards Board (IASB) suggest that almost $3 trillion of assets and liabilities will transfer onto corporate balance sheets in the coming years, impacting, key financial metrics, such as return on assets and EBITDA.

According to the report, for most companies, the monetary value of the real estate portion of the lease portfolio is higher than the equipment portion. However, corporations tend to have a far greater number of equipment assets than real estate assets, complicating administration and accounting efforts.

Heading the list, energy companies such as Royal Dutch Shell and BP typically lease a diverse range of assets, including offshore drilling rigs, tankers, terminals, pipelines, storage tanks, railway freight carriages, petrol, and convenience stores.

Telecommunications firms such as Vodafone Group and BT Group (6th/£6.6bn) lease a mix of real estate and equipment assets including mobile phone towers, data centre properties, fibre optic circuits, and networking equipment.

Retailers such as Sainsbury’s, Marks & Spencer (9th/£4.2bn), and Tesco (13th/£2.6bn) typically lease a large footprint of real estate for their stores and distribution centres as well as IT assets such as servers, storage, and data centre equipment to support their e-commerce operations.

Financial institutions such as HSBC (12th/£3bn), Barclays (15th/£2.5bn), and The Royal Bank of Scotland (17th/£2.3bn) typically lease a large footprint of real estate, including bank branches and office buildings, as well as technology assets such as servers, storage, and data centre equipment to support online banking and electronic trading operations.

Airline companies such as International Airlines Group, TUI Group (ranked 16th with £2.3bn of liabilities), and Wizz Air (19th/£2.2bn) typically lease significant space at airports for check-in, baggage checking, and departure gates. Additionally, these groups lease a significant percentage of the aircraft and components used to fly cargo and passengers to and from destinations.

Michael Keeler, CEO of LeaseAccelerator, said: ‘With the first interim statements to be reported under IFRS 16 now imminent, CFOs need to start developing strategies for communicating these balance sheet changes to their investor communities.

‘The publication of this report will help provide companies and CFOs with a perspective on the relative size and significance of their operating lease obligations compared to their industry peers.’

Report ranking the leasing obligations of the FTSE 350

Report by Pat Sweet

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