This document summarizes the key impacts of IFRS 16, the new lease accounting standard. It notes that IFRS 16 will require most leases to be brought onto companies' balance sheets, increasing reported assets and liabilities. This will significantly impact lessees' financial statements by increasing assets and liabilities. It will also affect reported metrics like gearing, EBITDA, and interest coverage ratios. The new standard provides a revised definition of a lease and new guidance for measuring lease liabilities. It allows for certain transition options but seeks to improve transparency around companies' lease obligations.

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IFRS16LeasesA more transparent balance sheet
13 January 2016
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“IFRS 16 will bring most leases on-balance
sheet from 2019. All companies that lease
assets for use in their business will see an
increase in reported assets and liabilities.
This will affect a wide variety of sectors, from
airlines that lease aircraft to retailers that lease
stores. The larger the lease portfolio, the
greater the impact on key reporting metrics.”
Moretransparentleaseaccounting
Kimber Bascom,
KPMG’s global IFRS
leasing standards leader
2

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What’stheissue?
Currently analysts adjust
financial statements for off-
balance sheet leases
Under IFRS 16, companies
will bring these leases on
balance sheet, using a
common methodology
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Majorimpactsfor
lessees

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Lesseesfacemajorchanges
Balance sheet P&L
Asset
Liability
Depreciation
+ Interest
= Front-loaded total lease
expense
= ‘Right-of-use’ of underlying asset
= Obligation to make lease payments
All major leases on balance sheet
5
Lease expense

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Impactonbalancesheet
Companies with operating
leases will appear to be
more asset-rich, but also
more heavily indebted
Asset Liability

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Impactonprofit/loss
7
Total lease expense will
be front-loaded even
when cash rentals are
constant
Depreciation Interest
Cash rental payments

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Impactonfinancialratios
GearingEBITDA
EPS
(in early years)
Net assets Interest cover
Asset turnover
Total assets
RatiosProfit/loss Balance sheet
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Newdefinition,
newaccounting

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OFF
ON
Leasedefinition
Old standard
New standard
Operating
lease
Service
Finance
lease
Lease
The new on/off-balance sheet test
for lessees – a key judgement area
ON
Lease
classification
test
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Leasedefinition–Control
The new definition
increases focus on who
controls the asset and
may change which
contracts are leases ?Lease Not a lease
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Leasedefinition–Exemptions
Two major optional
exemptions make
the standard easier
to apply
Leases of low
value items
Short term
leases
≤ 12 months ≤ USD 5,000
for example
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Measuringtheleaseliability
Present value of
expected
payments at
end of lease
Present value of
lease rentals +=Lease liability
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Variableleasepayments
Payments based on an
index or rate
Payments based on
turnover or usage
Which variable lease payments are
included in the lease liability?
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Lessoraccounting
but lacks consistency
with new lessee
accounting model
Lessor accounting
remains similar to
current practice…
Lease classification
test
Finance leases and
operating leases
Consistent
accounting model for
lessors and lessees
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Sale-and-leaseback
IFRS 16 essentially kills
sale-and-leaseback as
an off-balance sheet
financing structure
Is there
a sale?
On-balance
sheet lease at
cost
On-balance
sheet financing,
potentially at fair
value
Yes No

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Multipletransition
options

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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Applyingthenewleasedefinition
Apply the new definition to all
contracts
ComparabilityCost
Grandfather existing contracts
and apply the new definition
only to new contracts
OR
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Applyingthenewstandard
Retrospectively to all
accounting periods
ComparabilityCost
A lessee can choose to
apply the standard…
As a ‘big bang’ at the date of
initial application
OR
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IFRS≠USGAAP

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IFRSvsUSGAAP
We expect the FASB to publish its new standard soon
Lease
definition
Lessee
accounting
model
IFRS and US GAAP standards converged?
Leases on balance sheet
for lessees
Lessor
accounting
Detailed measurement
and transition
requirements
Exemption
for low value
items
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Nextsteps

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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Thingstothinkaboutnow
Some questions to
assess the impact
on your company’s
financial statements
Which contracts are leases?
Which transition options to choose?
Database of all leases?
Systems and processes in place?
What about ratios and covenants?
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Nextsteps
Read the new
standard
Think about your
implementation
plan
Watch out for our
detailed analysis
at kpmg.com/ifrs
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
© 2016 KPMG IFRG Limited, a UK company limited by guarantee and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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