Multinational companies could be sitting on a ‘leaseberg’ of huge proportions

Published 
  • New lease accounting rules (ASC 842, IFRS 16) will dramatically increase companies’ reported liabilities
  • The value of operational leases can equal almost two-thirds of the size of the company balance sheet
  • Large, multinational companies across industry sectors currently rely on a huge variety of operational leases to finance assets, which keep leases and their associated liabilities off balance sheets

The cost of lease commitments that currently don’t sit on the balance sheet can be upwards of 62% of existing balance sheets, according to new analysis by Aptitude Software, a global financial software specialist.

The new lease accounting standards (ASC 842 and IFRS 16) come into force at the start of next year, fundamentally changing how companies account for leases. It can move thousands of leases onto a company’s books and requires CFOs to apply accounting judgment across thousands of leases.

Companies rely on a huge variety of leased assets including premises, land agreements, delivery vehicles, machinery and IT equipment; Aptitude Software’s analysis shows that these operational leases can equal a material percentage of companies’ total asset values.

Ross Chapman, Global Marketing Director, said: “Many investors, CEOs and business managers are on course to hit the unforeseen impacts of new lease accounting rules. The financial effects of the new rules are largely unknown as most companies have yet to implement systems that can deliver control and transparency over lease accounting.”

The following table looks at five leading multinational companies in each sector to calculate an average value of operational lease liabilities against total assets. Examples of the highest recorded lease liability known in each sector have also been highlighted.

 

OPERATIONAL LEASE LIABILITIES VERSUS COMPANY NET ASSETS

Industry Sector

Average operational lease value as % of total assets (minus goodwill)

Average value of operational leases for observed companies
($B USD)

Company example

Company example: Operational lease value as % of total assets (minus goodwill)

Company example: value of operational leases

($B USD)

Oil & gas

6%

$10.6

Statoil

8%

$8.6

Manufacturing

6%

$9.8

CRH

9%

$2.7

Logistics

20%

$8.6

FedEx

43%

$17.8

Consumer product goods (CPG)

8%

$1.7

L’Oréal

11%

$3.5

Telecommunications

11%

$20.4

Deutsche Telekom AG

13%

$18.6

Financial Services / Banking

1%

$8.0

Bank of America

1%

$13.6

Technology

4%

$4.1

IBM

8%

$6.8

Retail

31%

$16.2

Walgreens Boots Alliance

62%

$31.4

Aptitude Software analysis of five well-known companies by industry, Jan 2018

 

Aptitude Software’s analysis shows that the total value of lease liabilities is only a small part of the issue when it comes to complying with the new standard. A wide variety of leasing arrangements complicate the compliance with new rules including intra-company lease transfers, sub-leasing and embedded options. Furthermore, US (ASC 842) and International (IFRS 16) lease accounting rules are distinctly different, challenging multinational companies to deliver multi-GAAP financial reporting.

Ross E. Chapman, added: “Whilst the new standard is summarized in just over 20 pages, it is deceptively complex. A very high level of judgment and consideration is needed to apply accounting consistently and appropriately across a diverse range of leasing arrangements. Whilst often out of sight, leased assets can be equivalent to an enormous proportion of a company’s value.”

“Some leading multi-nationals have realized that they were on course to hit a ‘leaseberg’ and have mobilized their teams to achieve compliance with new lease accounting capabilities. Many others, unfortunately, have not realized the real-world accounting challenges required to achieve compliance and gain control over the lease liabilities that will need to be managed on their balance sheets.”

The new lease accounting standard fundamentally changes accounting for lease transactions and will move hundreds or thousands of lease contracts onto a company’s books. All leases over $5,000 need to be disclosed. For global companies, leased assets need to be accounted for consistently regardless of where assets are stored. Some companies have reported that the new lease accounting standard will necessitate 66 times more journal entries than were previously required.

Jeremy Suddards, Aptitude Software Chief Revenue Officer, added: “The new leasing standards are an accounting nightmare. A global technology brand recently approached us with over $2 billion of operating leases. Applying the new accounting standard was going to have a huge impact on their business and they needed to understand exactly how new rules would affect their financial position.”

“After a series of mergers and acquisitions, this business has multiple ledgers and numerous different lease management systems. With over 50 entities around the world, the combination of multiple currencies, embedded equipment leases and other complex arrangements made achieving compliance and gaining control of lease accounting a priority.”

Aptitude’s Leaseberg Index combines available data on the value of lease liabilities with sector specific insights to estimate the overall challenge across key industries.

 

Most recent episodes

What to Do with Corporate Cash in Challenging Times

Corporate treasurers have myriad challenges to contend with in the short-term investment space. Here, Richard Hallett (Aviva Investors), Ed Lopez (Calastone) and Patrick Kunz (Pecunia Treasury & Finance) outline how to successfully navigate these roadblocks, debunk incoming regulations, and assess...

39:42

Trading Up: Supply Chain Trends Impacting Treasury

If you need a clear, concise and definitive guide to SCF in 2022 and 2023 then look no further! Due to their remit as financial risk assessors, treasurers need to understand the pitfalls associated with supply chain disruption. In this podcast, hosted by TMI’s Eleanor Hill, our expert guests Rowan...

34:28

£15 Billion Stimulus Pumped into UK Economy to Ward Off Recession Fears

Welcome to the latest edition of Liquidity Link Live, your exclusive market analysis provided by Northern Trust Asset Management, one of the world’s largest cash managers. Tune in each month to discover the very latest insights on the UK, Eurozone and US markets. This edition was recorded on the 7th June...

04:44

Advantage Treasury

Eleanor Hill is joined in the virtual TreasuryCast studio by Nicolas Cailly and Philippe Penichou (Societe Generale) to look at treasury trend predictions for the remainder of 2022, with a particular focus on virtual accounts. In this deep dive into current and future treasury priorities, our guests...

24:22

40th Annual New York Cash Exchange: What Can Treasurers Expect?

Ahead of the 40th annual New York Cash Exchange, two of TMANY's distinguished board members, David Miller and Timothy T. Hesler, CTP, provide TMI CEO, Robin Page, with a quickfire rundown of what attendees can expect from this year’s conference. Our guests share their aspirations for the event, explain...

09:58

Expectation-Beating Inflation Prints Ratchet Up Pressure on Monetary Policy

Welcome to the third edition of Liquidity Link Live, your exclusive market analysis provided by Northern Trust Asset Management, one of the world’s largest cash managers. Tune in each month to discover the very latest insights on the UK, Eurozone and US markets. This edition was recorded on the 9th May...

04:48

Making the Sustainable Transition: A Roadmap to ESG in Treasury

Over the last 18 months, Societe Generale has experienced a steady increase in requests from their corporate clients to integrate ESG features in treasury management.  Louis-David Rouyer, Philippe Pougeard, and Emmanuelle Petelle (Societe Generale) provide TMI's Eleanor Hill with a whistlestop run...

22:24

Lift Off for Fed Rate Rises

Welcome to the latest edition of Liquidity Link Live, your exclusive market analysis provided by Northern Trust Asset Management, one of the world’s largest cash managers. Tune in each month to discover the very latest insights on the UK, Eurozone and US markets. This edition was recorded on the 5th of...

04:58

Treasury in 2022 and Beyond

Industry experts Bob Stark (Kyriba) and Sebastian di Paola (PwC) join TMI's Editor, Eleanor Hill, to explore the very latest treasury trends - and to discuss how smart treasurers can get ahead of th...

43:21

How BearingPoint Harnessed Data-Driven Forecasting with CashAnalytics and SAP

Listen back to our recent forecasting masterclass, where Group Treasurer Eveline Stam, and Conor Deegan (CashAnalytics) provided TMI's Eleanor Hill with a comprehensive overview of how consultancy firm BearingPoint achieved company-wide cash forecasting nirvana by combining specialist solutions from...

37:14