Balance Sheet Impacts

With the introduction of the new lease accounting standards, several trillion dollars worth of assets and liabilities will transfer onto corporate balance sheets over the coming years. How will those new assets and liabilities impact the financial metrics that institutional and retail investors use to evaluate the financial performance of publicly traded companies? How will these new accounting rules impact asset turnover, return on assets, and quick ratio?

Income Statement Impacts

Profitability will be impacted by these new lease accounting standards as the way leasing expenses are reported on income statements for IFRS filers will change. In fact, a PwC research study found that the average company will experience a 13% increase in EBITDA. How will other profitability metrics, such as earnings per share, return on equity, and operating cash flow, be impacted?

Cash Flow Statement Impacts

The new lease accounting standards do not cause any differences in total cash flows. However, there are changes within the line items on the cash flow statement. With IFRS 16, companies will need to separate the cash paid into the principal portions of leases from that paid into interest portion. Operating cash outflows will be reduced while financing cash outflows will increase.

How the New Lease Accounting Rules Impact 18 Financial Metrics

Below is a list of how the new lease accounting rules impact financial metrics for 18 commonly used ratios and calculations. The expected changes for both the new FASB (US GAAP) and IFRS lease accounting standards are listed.

Asset Turnover

Asset turnover decreases under both the new FASB and IFRS lease accounting rules.
Asset turnover is net sales divided by average total assets.

 

Interest Cover

Interest cover is unchanged under FASB’s new rules. The impact varies under the IFRS rules.
Interest cover is EBITDA divided by interest expense.

 

EBIT/Operating Profit

EBIT/operating profit is unchanged under FASB’s rules, but increases for IFRS filers.

 

EBITDA

EBITDA will be unchanged for US GAAP, but will increase under new IFRS lease accounting rules.
EBITDA is earnings before interest, tax, depreciation, and amortization.

 

EBITDAR

EBITDAR will be unchanged for either US GAAP or IFRS.
EBITDAR is earnings before interest, tax, depreciation, amortization, and rent.

 

Profit or Loss

Profit or loss will be unchanged under FASB’s new rules. The impact varies under the IFRS rules.

 

Earnings Per Share

Earnings per share will be unchanged for US GAAP. The impact will vary for IFRS filers.
Earnings per share is calculated by dividing a company’s net income by the number of outstanding shares.

 

Operating Cash Flow

Operating cash flow will be unchanged under FASB’s new rules. It will increase under IFRS.

 

Return on Capital Employed

Return on capital employed will decrease under US GAAP. The impact will vary for IFRS.
Return on capital employed is typically calculated by dividing EBIT by equity and financial liabilities.

 

Net Cash Flow

Net cash flow is unchanged under both the new FASB and IFRS lease accounting rules.
Net cash flow is typically calculated by measuring the difference between cash inflows and outflows.

 

Gross Margin

Gross margin is unchanged under both the new FASB and IFRS lease accounting rules.
Gross margin is typically calculated by subtracting the costs of goods sold from a company’s revenues.

 

Operating Efficiency Ratio

Operating efficiency ratio is unchanged for US GAAP. It increases for IFRS filers.
Operating efficiency ratio is calculated by dividing operating expenses by net sales.

 

Return on Assets

Return on assets decreases under both the new FASB and IFRS lease accounting rules.
Return on assets is calculated by dividing net income by average total assets.

 

Return on Equity

Return on equity is unchanged for US GAAP. The impact varies for IFRS filers.
Return on equity is typically calculated by dividing net income by shareholder’s equity.

 

Quick Ratio

Quick ratio decreases under both the new FASB and IFRS lease accounting rules.
The quick ratio is calculated by comparing a company’s total cash, marketable securities, and accounts receivable to their current liabilities.

 

Current Ratio

Current ratio is unchanged for US GAAP. It decreases for IFRS filers.
The current ratio measures a company’s ability to pay short-term and long-term obligations.

 

Leverage Ratio

Leverage ratio is unchanged under US GAAP. It increases for IFRS filers.
Leverage ratio is typically calculated by dividing a company’s total liabilities by its stockholders’ equity.

 

Net Worth

Net worth decreases under FASB’s new lease accounting rules, but is unchanged under IFRS.

More Resources – New Lease Accounting Standards

White Papers, eBooks, and Webinars

Leasing Guides

Expert Guide | Private Companies – How to Get Started

| Accounting, Featured, White Papers | No Comments
Learn how to identify implementation challenges, assess your existing processes, and take an enterprise wide census of your leases.

Expert Guide | Separating Lease and Non-Lease Components

| Accounting, Guides, Real Estate | No Comments
To separate or not separate - That is the question creating anxiety for many technical accountants around the world as they implement the new leasing standards. Understand the pros and…
Lease Accounting Audit Completeness eBook

ASC 842 & IFRS 16 audit worries? Get ahead of the challenge.

| Accounting, Day Two, Guides | No Comments
What items will external auditors be focused on after the implementation deadline for lease accounting? There has been little guidance published by the big four firms yet. However, one topic…