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December 1, 2009updated 12 Apr 2017 4:29pm

Lease accounting to raise debts by 58%

The proposed changes to lease accounting will lead to companies reporting increased interest bearing debt, leverage and earnings before interest, tax, depreciation and amortisation (EBITDA), a new study reveals.

By Jason T

A study of 3,000 companies by PricewaterhouseCoopers and the Rotterdam School of Management showed that, based on the operating lease disclosures in the companies’ financial statements, interest bearing debt will increase by an average of 58 percent.

“This is a cautious estimate as only the impact of capitalising disclosed operating leases is quantified in the research,” the study said. “The impact on companies’ debt can be higher depending on the specific details in a final standard.”

PwC’s study also shows that the impact on financial ratios differs significantly per industry.

For example, for retail companies, the reported debt balances are expected to increase by an average of 213 percent, and the leverage – calculated as interest bearing debt divided by equity – will increase by an average of 64 percentage points.

Companies’ EBITDA will also be affected, the report added, since rent expense will be replaced with interest and amortisation expense, which are below-the-line charges. On average, companies will see an average increase in EBITDA of 18 percent.

But the authors noted that “the economic benefits of leasing will not change as a result of the proposed lease accounting”.

Jason T Hesse

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