Australian businesses do not fully understand and have not prepared for the implications of the new IFRS 16 leasing standard that comes into effect from 1 January 2019, according to the first in depth study of Australian corporate market readiness for IFRS 16 completed by Maia Financial.
Maia Financial’s report, Challenges and Opportunities in the New Leasing Standards, provides insights into Australian corporates knowledge and preparedness for the new standard, which will have far reaching implications on how organisations engage with key assets.
The new rules will affect financial metrics and performance metrics such as gearing, current ratio, asset turnover interest cover, EBITDA, EBIT, operating profit, net income, EPS, ROCE, ROE and operating cash flows, and six months out from the new standards coming into effect the lack of awareness and preparation within Australian corporates is concerning, says Maia Financial.
The new report reveals that while 97.2 per cent of organisations said they were aware of IFRS 16, one in five (19.2 per cent) said they were yet to assess its impact on their organisation. For smaller organisations, with between $50 and $100 million annual turnover, this figure more than doubled to 40.4 per cent, who were yet to assess how the new standard will affect them.
Maia’s research is based on findings from 250 interviews with chief financial officers, finance directors and business owners from organisations with annual turnover of $50 million and upwards.
Maia Financial’s Chief Executive, Daniel Blizzard, said, “Half of the organisations we interviewed believe the impact of the new standard would be small, while a further 23.6 per cent thought the likely impact would be significant. Businesses need to expediate assessment of IFRS 16’s likely impact, and move quickly to prepare to limit costs and credit implications.
“The higher reported debt levels under IFRS 16 may impact on organisation’s credit profile and their ability to raise funds, while the reporting and compliance has the potential to create new costs around data and IT processes.
“The new standard also has the potential to change the model for how organisations engage with assets. There is the potential for a new wave of innovation around ‘assets as a service’ which could transform the outsourcing wave of recent decades and echo what the likes of Uber and AirBnb are doing in the private market,” said Mr Blizzard.
Under IFRS 16:
- Virtually all assets will be recognised on balance sheets
- Many financial metrics such as debt levels, EBITDA and Return on Assets will be affected
- There will be no difference between operational leases and finance leases
One of the biggest changes under IFRS 16 will be on reported debt levels, but only 41.6 per cent of organisations say they have examined how it will affect their gearing.
Another feature of the new standard is an exemption for lower value assets costing $5000 or less when new, but only 47.2 per cent of total respondents said they are aware of this.
A majority of almost six in ten organisations (58.4 per cent) said they were yet to reach out to their auditors, consultants or finance providers and have discussions on the implications of the new standard.
“The clock is ticking down to 2019 on the new standard, so time is running out for many of these organisations to initiate these conversations about IFRS 16 and formulate their best strategic response,” said Maia’s Daniel Blizzard.
“Our research shows that knowledge of the changes is very superficial, and we would urge those organisations which have not yet done so to spend time on understanding what is ahead.”
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About Maia Financial
Maia Financial (www.maiafinancial.com.au) is a leading, independent structured finance house with more than 25 years’ experience. Its unique funds management model and access to large pools of global capital provides Maia Financial the capability to own, fund and operate substantial amounts of assets on and off the balance sheet for government, public and private corporations. Maia Financial is part of Monash Private Capital Group, backed by KKR and Highbridge Principal Strategies.