Nordea On Your Mind
– IFRS 16: The return of the leases

Off balance sheet leases moving onto the balance sheet from 2019

Off balance sheet leases moving onto the balance sheet from 2019
A Nordea On Your Mind on accounting practices? Yes, because it will greatly impact how investors and lenders view affected companies. The new IFRS 16 reporting standard will force all companies that report under IFRS in 116 countries around the world to start including operating leases on their balance sheets from 1 January 2019. Leased assets and associated lease debt will move onto balance sheets, and current (operating) leasing costs will be replaced by interest costs and depreciation. Companies with major operating leases will no longer appear asset-light.

Our screening analysis shows an adverse impact on reported leverage for listed Nordic corporates
In a joint effort with Nordea Markets Risk Advisory, we have carried out a screening of 206 listed Nordic large corporates, examining what reported 2016 numbers look like before and after our estimate of the impact from the implementation of IFRS 16. On median values, EBITDA will rise by 9%, but net debt will increase by 17%, nearly twice as much, pushing the equity ratio down from 44% to 41% and net debt/EBITDA up from 0.75x to 1.17x. Moving leases back onto balance sheets will also create FX risks for corporates with lease payments in foreign currencies.

Airlines, retailers and hotel operators will be most affected
Retailers and hotel operators are mainly affected through rental contracts for premises, while airlines also have leased aircraft. According to our screening analysis, the companies seeing net debt/EBITDA deteriorate the most following implementation of IFRS 16 will include Finnair, SAS, Rezidor, XXL, Kesko, Outotec, H&M and Clas Ohlson.

To avoid potential shock from the balance sheet changes, companies should prepare
Business operations and underlying cash flows will not change under IFRS 16, but reported numbers will look significantly different for some companies. Implementation is only 18 months away and we see a need for the most affected companies to guide and inform external parties such as investors, lenders and suppliers about what is coming. IFRS 16 should improve reporting transparency and the accuracy of underlying business performance, and any shock or surprise from a potential jump in reported leverage could be avoided by helping to ensure interested parties are well informed.

Interviews with those who know: SAS, EY and Nordea
In this issue, we interview Ilkka Kesti and Linn Sjöblom from Nordea Markets Risk Advisory, who have been instrumental in creating our IFRS 16 analysis. We also include our interviews with SAS’s Göran Jansson, CFO, and Jan Torberger, Group Treasurer, on how reported numbers and the use of leases might change after IFRS 16, and with Dan Phillips, Executive Director and IFRS specialist from EY, on how it will affect corporates.

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Analysts
Johan Trocmé (primary) | Head of Corporate Research | +46 101 56 34 22 | Analyst info
Kristina Kruse | Senior Analyst, Corporate Research | +46 101 56 52 23 | Analyst info

Nordea Bank | Markets | Equities

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