Retailers’ current ratios are changing for the worse
03 November 2017
In the latest of a series of videos highlighting the emerging accounting issues for different industries, Aletta Boshoff, National Leader of BDO IFRS Advisory, provides an overview of the effect of IFRS 16 Leases on the retail industry.
This video provides a summary of the key areas of change within the standard, and their impact on the financial statements of entities upon its adoption for periods beginning on or after 1 January 2019. The old finance and operating lease model from the existing IAS 17 has been replaced for lessees.
Retailers, who often lease many properties, to use as retail spaces and stores would in particular be impacted by this change, because currently these leases of properties are not included as liabilities in the financial statements of retailers. Going forward, the retailers would now recognise these leases as a right-of-use asset and a corresponding lease liability on the statement of financial position. It should be noted that the right-of-use asset is a non-current asset, whereas the liability would be split into a current and a non-current portion (payable within the 12 months after the reporting date).
Aletta discusses the impact of adopting IFRS 16 on the statements of financial position, profit or loss, and cash flows, including:
- IFRS 16 resulting in larger interest expense being taken through the statement of profit or loss at the start of the lease period
- That the reduction in the lease liability recognised would not match the depreciation profile of the right-of-use asset
- A portion of the lease liability will be classified as current, resulting in a reduction in current ratio
- The cash flow nature of lease payment changes from operating to financing (amounts paid that are attributed to interest are a policy choice).
Furthermore, Aletta also explains the potential changes and effects to other financial measurements such as KPIs, EBITDA and covenant requirements.
As always, BDO is here to help. If you require assistance in assessing how the new accounting standards impact your company, or have any questions about the video or its content, please contact Aletta Boshoff or your local IFRS Advisory expert.