Consumer products IFRS financial statements survey
Leases exposure draft's impact on consumer products
Although the issuance of a final standard will be delayed until 2012, off-balance sheet reporting for operating leases will be virtually eliminated.
Consumer product companies in our survey showed the following trends about leases.
- Although the issuance of a final standard will be delayed until 2012, off-balance sheet reporting for operating leases will be virtually eliminated.
- The proposal will significantly impact lease expense recognition and balance sheet metrics.
- Entities from the luxury and apparel sector, including cosmetics manufacturers, are likely to suffer significant changes.
Simulated impact on financial statements
The proposed new lease model will alter balance sheet and income statement metrics in various ways. While the on-balance sheet approach will increase liabilities and non-current assets, it will also impact equity.
- Liabilities — are increased by the present value of minimum lease payments at the inception of the lease. The amortisation during the lease term follows the effective interest method.
- Non-current assets — are increased by an amount corresponding to the lease liability at the inception of the lease. The asset will be measured using straight-line depreciation during the lease in the majority of cases.
- Equity — is affected due to the diverging measurement concepts of liability and asset. Generally, the liability will exceed the asset during the lease term, resulting in lower equity levels.
The proposed lease accounting method will alter key figures as follows:
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