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Paper on the new leasing standard and top ten considerations for investors

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13 May 2019

The CFA Institute, a global association of investment professionals, has published 'Leases: What Investors Need to Know About the New Standard'.

Companies' lease obligations are moving front and center onto the balance sheet, as a new leasing standard wnet into effect for both US GAAP and IFRS companies effective 1 January 2019. Because US GAAP and IFRS have decided on different solutions and transition methods, investors need to carefully consider the impacts of the new standards on the companies in which they invest. The CFA Institute has therfore prepared a guide to help investors understand the change they are about to witness. It provides the top ten considerations for investors as they evaluate the impact of the change to the new standard. As the most significant change and the greatest comparability challenges arise from lessee accounting, the report focuses on lessee accounting.

The top 10 considerations identfied in the report are:

  1. The Basics – Helping investors understand the basics of the new US GAAP and IFRS standards and their differences.
  2. Transition Methods – Explaining the methods and implications of transitioning to the new standards under US GAAP and IFRS – as well as the comparability challenge brought about by the differing methods.
  3. Transition Impact Disclosures – The transition disclosures to expect, some examples to illustrate, and how investors should evaluate the transition impact.
  4. Financial Statement Captions – The implications, and differences, of the new US GAAP and IFRS standard on financial statement captions. Including a quick illustration for those analytically inclined to visualize the effects and differences of the new standard on the income statement.
  5. Non-GAAP Measures – The implications of the different US GAAP and IFRS treatment of leases on the most notable non-GAAP measures. Most importantly, alerting investors to the fact that net income will likely be lower for IFRS companies while measures of operating income such as EBITDA and EBIT will be higher than the past and relative to US GAAP companies.
  6. Cash – Explaining how cash doesn’t change, but the statement of cash flows will change, for IFRS companies.
  7. Ratios – An analysis of the implications, and differences, of the US GAAP and IFRS standard on solvency, liquidity, profitability, earnings per share, return on equity, performance and coverage ratios. The comparability challenges abound and investors need to understand them.
  8. Disclosures – Why disclosures are more important than ever to investors now that the lease liabilities are measured in the financial statements. Considerations for investors as they analyze these new liabilities and value the company.
  9. Industries Impacted – A quantitative analysis of those companies in the S&P 500 expected to be most significantly impacted.Spoiler:  retail, transports and some sleepers.
  10. Market Expectations – Consideration of how the market might react to the newly visible leverage.

Please click to access the report on the website of the CFA Institute.

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