Business First - - PROPERTY RETAIL - Si­mon Fonteyn is Man­ag­ing Di­rec­tor, Leas­ing In­for­ma­tion Sys­tems.

As if re­tail tenants didn’t have enough con­cerns in this ever-chang­ing land­scape with con­sumer spend­ing de­creas­ing, top brands collapsing, on-line re­tail­ing con­tin­u­ing to grow in pop­u­lar­ity and the im­pli­ca­tions of the en­try of Ama­zon and other in­ter­na­tional mega-re­tail­ers into the Aus­tralian space. They now need to pre­pare for a new global ac­count­ing stan­dard, set to turn their balance sheets, sys­tems and pro­cesses up­side down and dra­mat­i­cally in­crease their li­a­bil­i­ties.

Anew global ac­count­ing stan­dard, known as IFRS16, will come into ef­fect in Aus­tralia on 1 Jan­uary 2019 and rad­i­cally change the way leases are recog­nised in fi­nan­cial state­ments with a range of ram­i­fi­ca­tions for the re­tail sec­tor.

Be­sides a whole lot of ad­di­tional pa­per­work, ad­min­is­tra­tion and new sys­tems re­quired for re­tail tenants to com­ply with this new stan­dard, there will be far-reach­ing im­pli­ca­tions in re­la­tion to loans and fi­nance with leases over one year in length to be recorded on the balance sheet as a li­a­bil­ity.

The ma­jor changes that will be in­tro­duced as part of IFRS16 re­quire a re­tailer to recog­nise a “right of use” as­set and li­a­bil­ity equal to the present value of all fu­ture known oc­cu­pancy costs, less any lease in­cen­tives.

The as­set could also recog­nise in­di­rect lease costs such as leas­ing fees, de­sign fees, sur­veys and any es­ti­mated make good obli­ga­tions.

Op­tions on leases can also be in­cluded, if there is rea­son­able cer­tainty that op­tion terms will be ex­er­cised. This will re­quire ei­ther a val­u­a­tion or man­age­ment to jus­tify a val­u­a­tion us­ing cur­rent lease ev­i­dence of com­pa­ra­ble rental amount.

For re­tail­ers, the li­a­bil­ity im­pli­ca­tions of IFRS16 are far­reach­ing and will hit hard, caus­ing ris­ing debt lev­els which will re­quire all re­tail­ers at best to rene­go­ti­ate their debt covenants with their fi­nanciers.

A re­cent PriceWater­house Coop­ers global study re­vealed that the re­tail sec­tor will be one of the in­dus­tries hard­est hit and es­ti­mated there will be a 90 per cent in­crease in debt for all re­tail­ers, with a 41 per cent in­crease in EBITDA as a di­rect re­sult of the im­ple­men­ta­tion of this new ac­count­ing stan­dard.

This sig­nif­i­cant blan­ket in­crease will re­sult from the lease li­a­bil­ity, with 95% per cent of all re­tail­ers in leased premises.

Sim­i­larly, the in­crease in EBITDA will stem from the fact that rental ex­penses, which typ­i­cally rep­re­sent be­tween 5 to 30 per cent of a re­tail­ers P&L cost, will dis­ap­pear and be re­placed with amor­ti­sa­tion and in­ter­est ex­penses of the li­a­bil­ity, which are ex­cluded from EBITDA.

Re­tail­ers need to start to pre­pare for these changes now and im­ple­ment lease man­age­ment sys­tems to cap­ture rental data that can value their lease port­fo­lio on a con­tin­ual ba­sis. Or they face a real night­mare in 2019.

The new ac­count­ing stan­dard will come as a shock to many re­tail­ers who are not pre­pared, when it qui­etly comes into play in Jan­uary 2019. It will cre­ate yet an­other fi­nan­cial ob­sta­cle for the dy­namic re­tail sec­tor, which is con­stantly evolv­ing and bat­tling the im­pacts of tech­nol­ogy and changes to con­sumer spend­ing pat­terns.

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