IFRS 16

Practical Implications & Impact on IAS

36 and short introduction of BDO Lead

Brussels, November 5
Steffen Eube & Moti Datttelkramer
BACKGROUND
 IFRS 16 effective date is for annual reporting periods beginning on or after January 1, 2019 (early
adoption is permitted)

 The new standard will change significantly lessee’s accounting principles (recognition, measurement
and disclosure)

 In general, the new standard does not change the existing accounting treatment for a lessor

 Main expected impacts on lessees:

 Increase in assets & liabilities in the balance sheet, and increase of the company's leverage

 Increase in EBITDA and in the operating profit

 Possible impact on market sentiment, stock prices, analyst reviews and credit ratings

 Significant influence on companies which have a large number of lease agreements (companies
from retail, aviation, transportation and energy sectors)

Valuation methodologies must be adjusted to reflect the expected changes due to the
new standard implementation
INCREMENTAL BORROWING RATE
THE DISCOUNT RATE FOR A LEASE LIABILITY
 Lease liability should be initially measured at present value of the future lease payments.

 Future lease payments will be discounted using the lease implicit discount rate, unless this cannot
readily be determined.

 The implicit discount rate is defined as the lessor’s IRR from the transaction.

 Usually, the implicit discount rate is not available, and therefore lessee’s incremental borrowing rate is
used instead.
 Incremental borrowing rate definition according to the Standard: "The interest rate that a lessee would have been
required to pay in order to borrow the amounts required to obtain an asset of similar value to the right-of-
use asset, in a similar economic environment, for a similar period and with similar collateral”.

 Below are some of the factors that might be considered in order to determine the “Incremental
Borrowing Rate”:
 Economic, state and currency risks;
 The risk of the lessee himself and lessee’s credit rating;
 The lease contract term and the expected repayment schedule;
 Lease’s terms - linked / unlinked;
 Appropriate collateral (LTV ratio, collateral nature and quality);
 Return rate on the property.
THE DISCOUNT RATE FOR A LEASE LIABILITY
n order to determine lessee’s incremental borrowing rate the Company should find an Anchor

 Anchor could be, for example:

 An interest rate on existing loan received from a third party;

 A traded bond yield;

 Company’s debt rating.

On this anchor, adjustments should be made, according to the factors that might be considered stated in the
slide above, for example: duration, linkage, currency, leverage and collateral adjustments.

 In collateral adjustments should be considered :

o "Right of use" as collateral to the lease contract - LTV of 100%

o Additional guarantees or deposits that may be provided

The incremental borrowing rate is determined from the lessee’s specific point of view
LESSEE’S INCREMENTAL BORROWING RATE (CONT.)
There could be a distortion in which a right of use asset will be initially measured at
a higher amount than the asset’s value, for example:

Party to the lease transaction Lessor Lessee

Annual Lease Fees (USD thousands) 100 100
Asset’s return rate / liability’s interest 7% 2.5%
Discount / cash flow period Infinite 20 years
Fair value Asset / liability as of today (USD 1,429 1,578
thousands)

• In this specific example, the fair value of the lessee’s right of use is higher
than the lessor’s property fair value

• Although this situation does not make sense economically, this situation
could exist while applying the new Standard
INCREMENTAL BORROWING RATE CHOSEN BY ISRAELI
PUBLIC COMPANIES
Following are examples for IFRS 16 incremental borrowing rates chosen by Israeli public companies:

• Food retail company - Victory Supermarket Chain Ltd. – 0.9%-3.3%

• Department stores chain - Hamashbir Department Stores Ltd. – an average of 4.5%

• Fashion stores chain - Fox-Wizel Ltd. – 2%-3.5%

• Telecom company - Bezeq The Israeli Telecommunication Corp Ltd. – 1.3%-3.6% (an average of 1.5%)

• Petrochemicals company - Oil Refineries Ltd. – an average of 3.5%

• Production & distribution of extracts for flavor and fragrance company - Frutarom Industries Ltd. – 1%-
4% (an average of 2.5%)

We can see that most companies chose a relatively low rate of incremental borrowing rates which is
lower than the average cape rate of assets which are between 6.5% to 8%
IMPACT ON FINANCIAL RATIOS AND VALUATIONS
IMPACT ON COMPARABILITY
 The need to examine the data of comparison / similar companies in order to understand how the
financial data had changed as a result of implementing the new standard;

 Other possible gaps:

 Differences between companies during the early implementation period

 Some gaps between companies that implement IFRS / US GAAP

IFRS 16 ASC 842

Balance sheet Lessees may elect to apply There is no exemption

recognition the recognition exemption for for leases of low-value
leases of ‘low-value’ assets assets
Lease classification Lessees apply a single on- There is a dual
balance sheet lease classification on-balance
accounting model. sheet lease accounting
model for lessees:
finance leases and
operating leases
IMPACT ON COMPARABILITY
IFRS 16
Remeasurement Lessees remeasure the lease
assessment for liability for changes in
leases tied to an variable lease payments
index or rate based on an index or rate on
the date when there is a
change in the contractually
required cash flows.
Sale-leaseback If the seller-lessee has a
transactions substantive option to
repurchase the underlying
asset, the transfer is not a
sale.
ASC 842
Adjustments to an index
or rate do not constitute
a reassessment event.
If the seller-lessee has a
substantive option to
repurchase an underlying
asset that is not real
estate, the transfer may
be a sale under certain
circumstances.
IMPACT ON FINANCIAL RATIOS AND MULTIPLES
IFRS 16 has an impact on Company’s and comparative companies’ financial data

 Possible impact on financial covenants compliance

 Possible impact on financial data and ratios:

 EBITDA rate, EBITDA multiples and operating profit rate

 Return to total assets ratio

 Leverage rate

 Interest coverage ratio

 Leveraged & unleveraged Beta

 We should take into consideration the impacts mentioned above in preparing valuations using
comparable companies’ data

 IFRS 16 might improve the comparison between companies which operate in the same industry, in
EBITDA terms, in cases that some of the companies chose to purchase assets while other companies
chose to lease similar assets
IMPACT ON MULTIPLE VALUATIONS – A THEORETICAL
EXAMPLE
Company A operates in the food retail industry, with the following data:

 The Industry average EBITDA multiple is 8

 Company’s A value is USD 320 million

 Yearly EBITDA is USD 40 million

 Yearly lease payments are USD 20 million

 Company A decides on an early implementation of IFRS 16 -

 Company’s EBITDA, after IFRS 16 implementation, is USD 60 million

 Without adjusting the valuation method – the new company A value is USD 480 million (=8*60)

Company A value is 50% higher while economically nothing happened!

TWO VALUATION ALTERNATIVES
I. Ignoring the new accounting treatment that the company has implemented and performing a
valuation under the assumption that the company would have recognized rental expenses, similar
to the treatment that would have been implemented under the old accounting standard

 The DCF forecast will reflect regular rental expenses

 The right of use asset and the lease liability are classified back to equity

 Valuation use the same methodology that have been used according to the old standard

 There is a need to receive data from the company in order to predict the future rental
expenses as well as the future investments (CapEx) and the future depreciation expenses

 Problematic for Impairment Test valuations (when right-of-use asset is part of CGU carrying
amount, this alternative won’t allow the required comparability to the value in use)

II. Valuation – IFRS 16 full application

VALUATION - IFRS 16 FULL APPLICATION
The following adjustments are required:

 Adjustments to the company’s value - deducing the lease liability (net debt) from the
operations value resulting the equity’s fair value (without deducing right-of-use asset)

 Adjustments to the operating expenses - company's forecasted operating expenses (in the
DCF) won’t include lease expenses

 Adjustments to operating cash flow -

I. Depreciation expenses (depreciating the right-of-use asset)

II. CAPEX (investments in right-of-use asset – future renewals)

Following are further details regarding main issues arising from the new standard implementation
CAPEX
 In most cases, the right of use is for a limited period (according to the lease contract period) while the
cash flow forecast assumes a Terminal Year (assuming that the company would operate perpetuity). In
those cases, the Company should renew the right of use throughout the forecasted period.

 Modeling these lease renewals (after termination of the existing lease) in the form of CapEx
 Composition of right of use asset - existing contract periods

 Assumptions regarding renewals: new lease period + discount interest rate

 Right of use for a period longer than 5 years will require an expansion of the forecasted period beyond five years

 Treatment can be simplified due to cost-benefit reasons

 In companies with a small number of significant leases (holding, industrial, technology and similar companies) -
specific modeling of each contract is needed

 In companies with a large number of leases (retail, telecommunications, aviation, energy, and similar companies)
- considering modeling several contracts together

 In the Terminal Year - CapEx should be equal to depreciation expenses

DISCOUNT RATE
 After recognizing the lease liability according to IFRS 16, the company's leverage would grow

 According to IFRS 16, the company uses additional debt capital (which until now was off-balance sheet)
to finance its operations

 Without any change in the WACC, cancellation of the rental expenses in the forecast, that were
discounted by the old WACC, while discounting those expenses to a lease liability in the balance sheet
using the Incremental Borrowing Rate, could lead to a decrease in the equity value

 Therefore the WACC rate should be adjusted, in order to maintain the equity value at the same amount

 This reduction is achieved by increasing the company’s normative leverage (D/V)

 The new normative leverage will be calculated using comparative companies that implement the new
standard, or alternatively, using leverage of comparative companies that do not implement the new
standard and adding additional specific leverage representing the lease liability

 There is great significance for selection of comparative companies and for in-depth analysis of each one
of the companies selected
TAX EXPENSE CALCULATION
 The implementation of IFRS 16 will probably create a gap between the Company’s point of view and
the tax authorities’ point of view

 Tax authorities may see the lease expenses as a taxable expense (when occurred), while the new
standard require recognition of depreciation and financing expenses, which may be different from the
periodic rental amount

 Those gaps will require recognizing a deferred tax liability / asset

 As the total depreciation and financing expenses are equal to the total lease expenses, but not identical
on a periodic level, we will reach a similar tax result, but not identical:

 In the first years of the lease agreement, we will recognize more accounting expenses than the
expenses recognized for tax purposes

 In the last years of the lease agreement, it will be the opposite way

 Allegedly, it is necessary to build a tax model with the tax expenses that the company will actually pay -
this is the most accurate option but complex for implementation

 During an Impairment Test, a question could arise regarding how deferred taxes balances should be
classified and of whether the deferred taxes balances should be part of the carrying amount
EXAMPLE (1)
EXAMPLE NO. 1
The following slides provide a numerical example under the following assumptions:

 The lease contract as of December 31, 2018 is for an additional 5 years term and was signed on
the same day (the right of use asset equal to the lease liability)

 Yearly lease payment of USD 10, payed monthly

 Tax authorities continues to recognize a yearly lease expenses of USD 10

 Incremental borrowing rate is 3%

 After termination of the current lease contract - it is assumed that the annual capital investment
will be equal to depreciation for the purpose of calculation ease
VALUATION ACCORDING TO THE OLD STANDARD
Old standard 2019 2020 2021 2022 2023 Terminal year Terminal growth rate
Revenues 100 120 130 135 140 142 1.5%
Operation expenses (without rent) (50) (60) (65) (68) (70) (71)
Rent expenses (10) (10) (10) (10) (10) (10)
EBITDA 40 50 55 58 60 61
% of revenues 40% 42% 42% 43% 43% 43%
Depreciation & amortization (2) (2) (2) (2) (2) (2)
Income before tax 38 48 53 56 58 59
Tax expenses (9) (11) (12) (13) (13) (14)
Income after tax 29 37 41 43 45 45
% of revenues 29% 31% 31% 32% 32% 32%
Adjustments
Depreciation & amortization 2 2 2 2 2 2
CAPEX (2) (2) (2) (2) (2) (2)
Change in working capital (1) (1) (1) (1) (1) (1)
Total adjustments (1) (1) (1) (1) (1) (1)
Free cash flow 28 36 40 42 44 44
Discount period 0.5 1.5 2.5 3.5 4.5 4.5
Discount rate 15.0%
Discounted cash flow 26 29 28 26 23 175
Enterprise Value 308
Net debt (50)
Company's value 258
VALUATION ACCORDING TO IFRS 16
New standard 2019 2020 2021 2022 2023 Terminal year Terminal growth rate
Revenues 100 120 130 135 140 142 1.5%
Operation expenses (without rent) (50) (60) (65) (68) (70) (71)
EBITDA 50 60 65 68 70 71
% of revenues 50% 50% 50% 50% 50% 50%
Depreciation & amortization (11) (11) (11) (11) (11) (11)
Income before tax 39 49 54 56 59 60 Including yearly
Tax expenses (9) (11) (12) (13) (13) (14) depreciation of (9) -
Income after tax 30 38 42 43 45 46 right of use asset’s
depreciation over
% of revenues 30% 31% 32% 32% 32% 32%
five-year period
Adjustments (9=46/5)
Depreciation & amortization 11 11 11 11 11 11
CAPEX (2) (2) (2) (2) (2) (11)
Change in working capital (1) (1) (1) (1) (1) (1)
Assuming yearly
Total adjustments 8 8 8 8 8 (1)
CAPEX level
Free cash flow 38 46 50 52 54 45 equals to
Discount period 0.5 1.5 2.5 3.5 4.5 4.5 depreciation &
Discount rate 14.7% amortization
Discounted cash flow 36 37 35 32 29 185 expenses level
Enterprise Value 354
after the current
Lower than 15% due lease contract’s
Net debt (50)
The lease liability as of the to Company’s higher end
Lease liability (46)
valuation date will be added leverage
Company's value 258
to the company's value
(calculated by discounting
the future lease payment
using the incremental
borrowing rate 3%)
EXAMPLE (2)
RETAIL COMPANY X IFRS 16 IMPACT
 BDO Israel consulted an Israeli retail company on a process of calculating the future impact of IFRS 16
implementation.

 The company has more than 100 leases – out of them: 1) ~100 shops long term leases, with minimal
fixed lease payments; 2) 2 warehouses long term leases; 3) ~80 car leases (3 years term).

 All the leases mentioned above are in the scope of IFRS 16 and are linked to the CPI.

 Part of the lease agreements include also operating fees agreements (for different operating expenses
of the shop that the lessor will pay on behalf of the company, for example: electricity, cleaning, etc.).
Those agreements aren’t in IFRS 16 scope as there is no minimal fixed payment in the agreements.

 The company chose the Modified Retrospective Approach.

RETAIL COMPANY X IFRS 16 IMPACT (CONTINUED)
In order to provide the appropriate incremental borrowing rate for the leases, we took the following steps:

1. Choosing an appropriate anchor: the Company has a bank loan received just a few months ago,
with a fixed interest rate. We used the loan terms to calculate the company’s implied credit risk.

2. Calculating each lease’s average term.

3. For the shops & warehouses leases we used Company’s credit risk, as the Company is a retail
Company and the shops are the heart of its operations.

4. For the car leases we used a lower credit risk, as the car lessor has higher guarantees and the
lease agreement has a lower risk for the lessor.

5. The incremental borrowing rates were calculated according to the implied credit risk, according to
the mentioned above, and according to each lease’s term.

The incremental borrowing rates are as following (all CPI linked):

• For shops & warehouses leases –0.7%-2.52% for 1.5-9 years periods

• For car leases – 0.66% for 0.75 years period

IFRS 16 – IMPACT ON IMPAIRMENT TESTS
ACCORDING TO IAS 36 – CASE STUDY
IMPACT ON ADOPTION TO IFRS 16

How is the Carrying

Is there an impact of
Amount calculated? Is there an impact on
IFRS 16 on the business
What is included and Capex?
plan?
what is not?

<
𝒏
𝐅𝐫𝐞𝐞 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰𝐬 How do we
+ 𝑻𝑽
>
Book Value (CGU) 𝐧
model the
(𝟏 + 𝐖𝐀𝐂𝐂) Terminal Value?
𝒊=𝟏

Make sure to be What are the effects on WACC?

equivalent! How does the leverage kicks in?
IMPAIRMENT TESTING UPON TRANSITION TO IFRS 16

As of transition and initial application date, IAS 36 applies to right-of-use-

Transition pursuant to
assets at the date of initial application. An exception applies if the lessee
IFRS 16.C8 (c)
makes use of the simplification provided by IFRS 16.C10(b).

Pursuant to preveailing opinion, the initial application if IFRS 16 (i.e.

Initial application does
initial recognition of a right-of-use-asset as part of the carrying amount of
not constitute a
a CGU) by itself provides no indication for a triggering event pursuant to
triggering event
IAS 36, which would result in value adjustments.

Impairment testing only The transition regulations are only applicable if, as of transition date, an
required upon triggering indication for impairment was already existing and had led to an
event impairment test already.

In case a right-of-use-asset does not independently generate positive cash

Testing of right-of-use flows (usual case), the basic principle of IAS 36 applies. Then, impairment
assets? testing has to be performed at the level of the CGU to which the right-of-
use-asset was assigned.
TRANSITION PHASE AND IMPLICATIONS FOR
IMPAIRMENT TEST
Special features and discussion points
31 December 2018 1 January 2019
For impairment tests before or Conversion to IFRS 16 does not by
on 31 December, IFRS 16 is not itself constitute a triggering event
taken into account (if no early under IAS 36
adoption), but information on
the effects of first-time
application of IFRS 16

Transition phase

1 January 2019 Subsequent periods

For impairment tests from 1 January
2019, IFRS 16 must be taken into
account in the carrying amount and in
determining the recoverable amount
 Model adjustment required
In addition to the updates at reporting
date of the impairment test models
(business plan, cost of capital
parameters, terminal value
assumptions), additional analyses of the
adequate debt-equity ratio are to be
carried out
CASE STUDY IMPAIRMENT TEST ACCORDING TO IAS 36
Carrying amount of the CGU: comparison of IAS 17 and IFRS 16

31.12.2018: Operating Lease (IAS 17) 1.1.2019: Leasing according to IFRS 16

“Balance Sheet” Carrying Amount “Balance Sheet” Carrying Amount***

Usage Usage
rights rights
Equity 62 Equity 62
Assets Assets 350
350 Carrying
400 400
Amount
500 Carrying
Assets Assets Amount
Net Net 562
400 Debt** 400
NWC* Debt** NWC*
100 150 100 150

500 500 500 500 Leasing

NWC* liabilities NWC*
* Net Working Capital 100 62 100
** Long-term liabilities minus cash on hand
*** Book value of a recognised liability is usually not assigned 562 562 562 562
to a CGU (IAS 36.76 [b])
New balance sheet items resulting from the application of
IFRS 16
CASE STUDY IMPAIRMENT TEST ACCORDING TO IAS 36
Plan Profit, Loss and Loss calculations (Business Plans)

31.12.2018: Operating Lease (IAS 17) 1.1.2019: Leasing according to IFRS 16

2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
Umsatz 1.000 1.000 1.000 1.000 1.000 Umsatz 1.000 1.000 1.000 1.000 1.000
Materialaufwand (700) (700) (700) (700) (700) Materialaufwand (700) (700) (700) (700) (700)
SG&A (200) (200) (200) (200) (200) SG&A (200) (200) (200) (200) (200)
Leasingaufwand (OL) (22) (22) (22) (22) (22) Leasingaufwand (OL) - - - - -
EBITDA 78 78 78 78 78 EBITDA 100 100 100 100 100
Abschreibungen - Sachanlagen (10) (10) (10) (10) (10) Abschreibungen - Sachanlagen (10) (10) (10) (10) (10)
Abschreibungen - Nutzungsrechte - - - - - Abschreibungen - Nutzungsrechte (21) (20) (20) (20) (20)
EBIT 68 68 68 68 68 EBIT 69 70 70 70 70
Zinsaufwand - Finanzverbindlichkeiten (10) (10) (10) (10) (10) Zinsaufwand - Finanzverbindlichkeiten (10) (10) (10) (10) (10)
Zinsaufwand - Leasingverbindlichkeiten - - - - - Zinsaufwand - Leasingverbindlichkeiten (2) (2) (2) (2) (2)
EBT 58 58 58 58 58 EBT 57 57 57 57 58
Steueraufwand (17) (17) (17) (17) (17) Steueraufwand (17) (17) (17) (17) (17)
Jahresüberschuss 40 40 40 40 40 Jahresüberschuss 40 40 40 40 40

• Lease expenses reduce free cash flow as a recurrent,
cash-effective component of expenses (including
financing component)
• No impact on scheduled amortisation and financing
cash flow
• In planning, replacement of leasing expenses (cash-
effective) by depreciation of the right of use (not
cash-effective) and interest expense (as part of the
financial result)
CASE STUDY IMPAIRMENT TEST ACCORDING TO IAS 36
Projected balance sheets

31.12.2018: Operating Lease (IAS 17) 1.1.2019: Leasing according to IFRS 16

31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12.
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
Goodwill 300 300 300 300 300 Goodwill 300 300 300 300 300
Sachanlagen 100 100 100 100 100 Sachanlagen 100 100 100 100 100
Nutzungsrechte - - - - - Nutzungsrechte 61 60 60 60 60
Umlaufvermögen 260 260 260 260 260 Umlaufvermögen 260 260 260 260 260
Kasse 100 100 100 100 100 Kasse 101 101 101 102 102
Aktiva 760 760 760 760 760 Aktiva 822 822 822 822 822
Eigenkapital 350 350 350 350 350 Eigenkapital 350 350 350 350 350
Finanzverbindlichkeiten 250 250 250 250 250 Finanzverbindlichkeiten 250 250 250 250 250
Leasing-Verbindlichkeiten - - - - - Leasing-Verbindlichkeiten 62 62 62 62 62
Kurzfristige op. Verbindlichkeiten 160 160 160 160 160 Kurzfristige op. Verbindlichkeiten 160 160 160 160 160
Passiva 760 760 760 760 760 Passiva 822 822 822 822 822

• Presentation as "pending business", no accounting for
rights of use and lease liabilities
• Consideration of the usage rights and leasing liabilities
• Results in a balance sheet extension compared to IAS 17
• Straight-line depreciation and (re-)investments in the
usage rights over time, deviating from the follow-up
balance of the leasing liabilities (according to the
repayment process) (see following pages)
CASE STUDY IMPAIRMENT TEST ACCORDING TO IAS 36
Derivation of free cash flow

31.12.2018: Operating Lease (IAS 17) 1.1.2019: Leasing according to IFRS 16

2019 2020 2021 2022 2023 TV 2019 2020 2021 2022 2023 TV
EBIT 68 68 68 68 68 68 EBIT 69 70 70 70 70 71
Adjustierter Steueraufwand (20) (20) (20) (20) (20) (20) Adjustierter Steueraufwand (21) (21) (21) (21) (21) (21)
NOPLAT 47 47 47 47 47 48 NOPLAT 48 49 49 49 49 49
+ Abschreibungen - Sachanlagen 10 10 10 10 10 10 + Abschreibungen - Sachanlagen 10 10 10 10 10 10
+ Abschreibungen - Nutzungsrechte - - - - - - + Abschreibungen - Nutzungsrechte 21 20 20 20 20 20
- Investitionen - Sachanlagen (10) (10) (10) (10) (10) (11) - Investitionen - Sachanlagen (10) (10) (10) (10) (10) (11)
- Investitionen - Nutzungsrechte - - - - - - - Investitionen - Nutzungsrechte (20) (20) (20) (20) (20) (21)
+/- Veränderungen NWC - - - - - (1) +/- Veränderungen NWC - - - - - (1)
Free Cash Flow 47 47 47 47 47 46 Free Cash Flow 49 49 49 49 49 47

• Consideration of replacement investments in the lease

• Determination of investments in TV taking into
assets in free cash flow assuming a portfolio with a
account growth retention
constant average remaining useful life
• In the present case, investments and depreciation on
TV were determined taking into account expected
long-term growth (inflation)
• In the case of a cyclical reinvestment case, further
analysis is required to determine the sustainable
average reinvestment requirement on TV
CASE STUDY IMPAIRMENT TEST ACCORDING TO IAS 36
Derivation of the recoverable amount with unchanged WACC

31.12.2018: Operating Lease (IAS 17) 31.12.2018: Operating Lease (IAS 17)
DCF 2018 2019 2020 2021 2022 2023 TV
Kapitalkosten Free Cash Flow 47 47 47 47 47 46
Barwertfaktor 7,5% 0,93 0,87 0,80 0,75 0,70 10,70
Risikofreier Zinssatz 1,3% Barwert Free Cash Flow 44 41 38 35 33 489
Beta (levered) 1,15 Recoverable Amount 681
Marktrisikoprämie 6,5%
Impairment Test zum 31.12.2018
EK-Kosten 8,7%
Recoverable Amount 681
FK-Kosten (vor Steuern) 4,0% Carrying Amount 500
Headroom 181
Steuersatz 30,0%
Tax Shield 1,2%
FK-Kosten (nach Steuern) 2,8% 1.1.2019: : Leasing according to IFRS 16
EK-Quote 80% DCF 01.01.2019
2019 2020 2021 2022 2023 TV
FK-Quote 20% Free Cash Flow 49 49 49 49 49 47
Barwertfaktor 7,5% 0,93 0,87 0,80 0,75 0,70 10,70
WACC 7,5% Barwert Free Cash Flow 46 43 39 37 34 502
Recoverable Amount 700

 Equity ratio/borrowing rate determined on the Impairment Test zum 01.01.2019 At identical WACC
basis of the average historical capital Recoverable Amount 700 (7,5%), the result is a
Carrying Amount 562
42 less headroom!
structure of the peer group companies Headroom 139

(established approach in practice)

SUMMARY
IMPACT OF IFRS 16 ON THE IMPAIRMENT TEST
Summary

1 The introduction of IFRS 16 has a significant impact on balance sheet, comprehensive income and key figures
of lessees. The effects depend on the chosen initial application method and the use of possible facilities.

The conversion also has effects on the determination of significant elements of the impairment test in
2 accordance with IAS 36 (carrying amount and recoverable amount of CGUs), which may lead to a change in
the test results due to conversion.

A determination of the WACC, taking into account the changed capital structure, necessitates adjustments to
3 the conventional approach, at least in the transformation phase due to the lack of observable capital market
data for the lease liabilities of the peer group, taking into account the principle of equivalence.

An in-depth analysis is required when examining the WACC or IFRS 16 specific adjustments during the
4 transitional period. In addition, a continuous reconciliation with current capital market data (including IFRS
16 conversion) should be carried out.

In case of the required adjustment of the impairment test models according to IAS 36 due to the conversion
5 to IFRS 16, it is recommended to anticipate the practicability of the concept not only for the conversion date
but also for the subsequent periods.
IFRS 16 – ACCEPTING CHALLENGES
BDO Leasing Administration Solution - LEAD
BDO IFRS 16 EXPERIENCE – SELECTION OF CLIENTS

Deutsche Bank Bayern LB

Financial Financial

Implementation of Implementation of
IFRS 16 IFRS 16

2017/2018 2017/2018

Hofer KG Bijou Brigitte Deutsche Telekom Capital Stage Nemetschek SE PSI Software AG

Consumer goods Consumer goods Telecommunication Renewable energy Software Software

BDO LEAD BDO LEAD Implementation of Implementation of Implementation of Implementation of

IFRS 16 IFRS 16 IFRS 16 IFRS 16
2016/2017 2017/2018 2017 2017 2017 2017
BDO LEAD
Basic information
BDO LEAD – YOUR ADVANTAGES AT A GLANCE

Error check
Input
Storage
Entry Databases

Accounting

Analysis/Notes
Steering
function

Programm settings

BDO LEAD
• is independently applicable without continuing professional and technical support,
• integrates company-specific accounting guideline,
• distinguishes the respective perspective of the accounting (lessee and lessor),
• connects an archiving and balancing function,
• supports the user in the target-oriented evaluation of the information by the smart analyzer tool and
the specification of the notes details using the disclosure function,
• contains further additional functions, e.g. critical date and history tracking,
• allows US-GAAP (ASC 842) lease accounting in addition to IFRS 16 and the import to SAP, including
bookings
IFRS 16 MASTERING CHALLENGES SUCCESSFULLY

Required
notes
according to
IFRS 16

Effect on Existence of
key a lease contract
performance according to
indicators IFRS 16
Analysis Notes

Areas with
standard topics

Assessment Management
Other
lease Scope of
transactions application
(SALB/Sublease) IFRS and
US-GAAP

Accounting of
asset
and
liability
DATABASE MYSQL - STRUCTURE

Contract party
User
SALB
Components

Asset Master database

(lessee/lessor contract data) Portfolio
Reassessment

Categories Modification
Currency

Date
RECONCILIATION IFRS 16 ACCOUNTING LOGIC AND
CREDITOR PROCESS
• BDO LEAD is not linked to the creditor process
• The accounting of leases occurs parallel to the creditor process. Therefore it is necessary to reconcile
the entries via clearing accounts
• The future necessary coordination process is illustrated by the following example (rent EUR 100, of
which EUR 20 for services (non-lease services))

Payment process

Booking entry
DR lease expense CR lease liability 100

Difference of 0
Payment entry 100
DR lease liability CR bank

IFRS 16 booking logic „finance lease“

Booking entry: Accounting for lease liability

and RoU DR RoU-Asset CR lease liability 500

Recurring entry 78 80
lease expense reversion and reduction of DR lease liability CR lease expense
the lease liability DR interest expense 2

P&L reversion
DR service expense CR lease expense 20
DATA CAPTURING TEMPLATE
CREATION OF CONTRACTS

• BDO LEAD offers a

 (partially) automated solution, which enables the recording and analysis of leasing data,
 transfer of existing leasing contract data via an (import) interface.

• BDO LEAD ensures that the history of the entries can always be tracked (every change is auditable)
ENTERING BASIC DATA
LEASE TERM

• At the commencement date, a lessee

needs to recognise a ROU asset and a
lease liability. The commencement
start and end date are to be entered
into BDO LEAD.
• BDO LEAD can account for
recognition exemptions under IFRS
16, that is short-term and low-value
leases.
• If a lease contract contains an
extension option, which is assessed
to be reasonably certain at the
commencement date, the respective
flag can be tagged in BDO LEAD.
BDO LEAD
BDO LEAD modules
BASIC MODULES

BDO LEAD is offered in a modular system:

Basic module lessee
• Full functionality of archiving and accounting leases for lessees under IFRS
• The integration of individual accounting policies facilitates the automatic selection of preset
recognition exemptions and other company accounting guidelines (e.g. treatment of portfolio
leases or the separation or non-separation of leases and services)
• Analysis resp. evaluation of the data

Basic module lessor

• Full functionality of archiving and accounting leases for lessors under IFRS
• Like the basic module for lessees, this module facilitates the automatic selection of preset
recognition exemptions and allows for the integration of company-specific accounting policies
• In the context of lease contract classification and the interpretation of legal terms on the side of
the lessor, this function gains importance as the lessor’s lease accounting continues to
differentiate between operating and finance leases
• Analysis resp. evaluation of the data
ADD-ON MODULES

Module authorization
• By distinguishing between read and write rights, different roles can also be assigned to different
employees, e.g. contract amendments can only be stored with prior consent by a higher instance

Customisation
• Individual adaptation or additions to BDO LEAD
• Further design elements, e.g. provision of additional software interfaces or extension with additional
language modules
BDO LEAD
Technical specifications
TECHNICAL SPECIFICATIONS

• Very slender Windows-web-based application designed for popular browsers (IE, Firefox, Chrome)
 Possibility of operating on a virtual server instead of a local hardware solution
• Server infrastructure: Windows Server 2012
• Platform: .NET 4.6.1 Framework
• Database System: MS SQL Server 2014, SQL Server Express
• Authorization: Is done through a group in Windows Active Directory
• Programmed on the basis of C ##
THANK YOU!