Kingfisher faces £2.6bn lease liability on balance sheet
16 Aug 2019
FTSE 100 home improvement group, Kingfisher, has warned that the new lease accounting standard, IFRS 16, which it has adopted retrospectively, has affected certain half year 2018/19 and full year 2018/19 income statement line items, including retail profit by geography
16 Aug 2019
The company stressed that the lease standard ‘has no economic effect on Kingfisher's business or cash flow, however it does impact the way assets, liabilities and the income statement are presented’. This has resulted in an estimated £2.6bn in discounted future lease payments recognised as lease liability, with a right of use asset of around £2bn.
As a major retailer with multiple leases, Kingfisher operates under four retail brands - B&Q, Castorama, Brico Dépôt and Screwfix. It has over 1,300 stores in 10 countries across Europe, Russia and Turkey.
The group has multiple retail leases, particularly in the UK where it has over 900 stores, split between B&Q and Screwfix, the majority in lease arrangements.
These now have to be accounted for on the balance sheet. The main impact is from the UK due to high proportion of leasehold stores in this geography, Kingfisher said, where only 12% of retail space is owned.
Kingfisher has adopted the full retrospective transition approach replacing IAS 17 Leases with IFRS 16 from 1 February 2019, which requires the restatement of comparative P&L, balance sheet and cashflow statements.
It has released an analysis of the impact of IFRS 16 with an unaudited profit and loss impact statement for 2018/19, showing that the majority impact is on store costs with a minimal impact on gross margin. The rent charge has been removed from the P&L, offset by depreciation of lease right-of-use assets.
Under IFRS 16 the income statement expense comprises a straight-line depreciation charge on the right-of-use asset and a front-loaded interest charge on the lease liability, both over the term of the lease. For an individual lease, this provides an overall front-loaded expense profile compared with the straight-line rental charge recognised under IAS 17. The standard is not expected to result in a material impact on restated underlying profit before tax.
The Kingfisher update stated: ‘At the commencement of the lease, total P&L charges are higher than under IAS 17 as interest is charged on the outstanding lease liability, which reduces over the term. Toward the end of the life of the lease, total charges fall below IAS 17.’
It added that asset and liability remeasurements included market rent reviews/indexation and changes in assessed term. At the same time, rent prepayments and accruals removed from working capital receivables and payables.
‘The retail sector was always going to be significantly impacted by IFRS 16. This is quite simply because the most significant assets they use in their business are the stores from which they operate and these assets are often leased on medium to long-term operating leases,’ said Andrew Marshall, senior technical partner at KPMG.
‘Under IAS 17 Leases, these leases have been “off-balance sheet”, with neither the property assets nor the related financial liability included; the only impact on the financial statements has been the annual operating lease charge. Under IFRS 16 Leases, as has been well advertised, such leases will come “on-balance sheet” and the income statement impact will change.
The issues retailers will face are common to all leases, although retail will be one of the hardest hit.
‘All retailers will face substituting the IAS 17 straight line operating lease charge with the IFRS 16 straight line depreciation of the right of use asset and declining interest charge,’ said Marshall, ‘and consequently, a higher earnings before interest, tax, depreciation and amortisation (EBITDA), as depreciation and interest are excluded, whereas the old operating lease charge was not; and the end of the sale and leaseback regime as a way of reducing debt.’
Kate Beeston, accounting writer at Croner-i, who has been analysing early IFRS 16 adoption trends for Company Reporting, said: ‘We've seen this over a number of entities, and will continue to see this as companies adopt IFRS 16.
‘The impact on the P&L can look significant but it is important to remember that it will flatten over the life of the lease.’
Further details will be published in Kingfisher’s half year 2019/20 results, which will be released on 18 September 2019. This will include interim condensed consolidated financial statements prepared on an IFRS 16 basis, with fully restated half year and full year comparatives. Kingfisher has been audited by Deloitte since 2009.