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MOSL: IND-AS-Lease accounting undergoes revision-Operating leases to be capitalized

Ind-AS: Lease accounting undergoes revision; Operating leases to be capitalized, facilitate better comparability

 

• Ind-AS 116 accounting for leases comes into effect from FY20 (replacing the erstwhile Ind 17). The new standard requires long-term liability toward operating lease payment (currently off balance sheet) to be recognised in the balance sheet with a corresponding intangible asset in the form of right-to-use the asset.
• The new standard will bring a paradigm change in the reported earnings (PAT/EBIDTA), return ratios (RoCE/RoE), leverage, asset turns and valuation multiples, thereby improving the comparability in financials of players with different asset ownership/lease strategy within the same sector.
• The companies with forex-denominated lease will have more volatility in earnings, as the MTM due to foreign exchange fluctuation arising from lease liabilities so recognised needs to be routed through the income statement.
• This is an accounting change, and thus, will not bring any change in overall cash flows for companies. However, reported operating cash flows will increase with a corresponding decline in financing and investing cash flows.
• Our analysis of BSE-500 companies highlights that 20 companies have rentals in excess of 5% of revenues and will be most impacted. These companies operate primarily  in the airline, retail, quick service restaurants, telecom and entertainment sectors, which are highly reliant on the operating lease model.