The International Accounting Standard Board (IASB) issued new accounting standard on Lease accounting (IFRS 16) in January 2016. This standard shall be effective as of 1st January 2019 replacing IAS 17. Separately, the Indonesian Financial Accounting Standard Board (DSAK-IAI) issued PSAK 73 “Lease” in 2017 which replaces the old standard “PSAK 30”. This new standard will take effect for financial statement beginning 1 January 2020 which is part of the DSAK – IAI commitment to fully adopt IFRS while maintaining at least one-year gap.
PSAK 73 defines what a lease is and, subject to certain recognition exemptions, companies now have to bring operating lease to balance sheet (only finance lease were included previously) and can no longer leave them as off-balance sheet item. The distinction between operating and finance lease under the old “PSAK 30” is eliminated and now the standard provides certain exemption on short term contract and low value of assets.
Due to the above changes, some commonly used financial ratios will be impacted i.e. debt to equity ratio as the new standard requires entity to recognize a right-of-use asset and a corresponding lease liability for almost all lease contracts. The standard also gives significant impact to the entity’s profit & loss (PL) and Earning Per Share (EPS) as now the entity has to recognize interest expense on lease liability and depreciation on “right-of-use” assets. Meanwhile, Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) will increase as rental expense which was previously classified as operating expense under the old standard are now excluded from EBITDA and recorded as interest and depreciation expense.
Moreover, the new standard will also affect an entity’s cash flow statement as lease payment relating to contract that was previously classified as operating lease and presented as part of operating activities will no longer be presented as operating cash flow in full. Only part of lease payment that reflect interest on the lease liability can be presented as cash flow from operating activities whilst cash payment for principal portion of the lease liability should be presented as cash flow from financing activities.
Below are financial performance impact on lessee financial statement:
|KPI||Formula||Impact new standard||Reasonable|
|Debt to equity ratio||Liabilities divided equity||Increase||Lease liability which previously off balance sheet now recorded on balance sheet|
|EBITDA||Earning before interest, tax, depriciation and amortization||Increase||Lease expense is now excluded from EBITDA|
|EBIT||Earning before interest and tax||Increase||Depreciation expense added lower than lease expense eliminated from operating income|
|Operating cash flows||Net profit||Increase||Operating lease payment move to financing activities|