The report is based on the operations of Qantas Airways in five recently years and focus on two recent years.
Related topics In a nutshell Australian Accounting Standard AASB 16, Leases Standard or AASB 16was issued in February and is effective for periods beginning on or after 1 Januarymeaning that for many Australian entities the changes will be effective for 30 June year-ends For lessees with operating leases, a right-of-use asset will now come onto the balance sheet together with a lease liability For lessors, the finance and operating lease distinction remains largely unchanged Previous high-level analysis of current financial statement disclosures of telecom operators indicates a possible average increase in EBITDA margin of 2.
For lessors the finance and operating lease distinction and the accounting for leases remain largely unchanged The Standard supersedes the previous standard and related interpretations and brings in a new definition of a lease that will be used to identify whether a contract is, or contains, a lease AASB 16 is effective for periods beginning on or after 1 Januarywith earlier adoption permitted only if AASB 15, Revenue from Contracts with Customers AASB 15has also been applied.
What will this do to KPIs of telecom operators? The KPIs most frequently used by analysts for telecom companies are EBIT, EBITDA Under the new guidance the recognition of a right-of-use asset and a lease liability will lead to depreciation and interest expense which will be front loadedrather than the current straight-lined operating lease expenses.
Our high level analysis of operating lease disclosures by telecom operators indicates that the removal of lease costs from operating expenses could result in EBITDA margins increasing by an average of 2.
Telecom companies will also need to consider whether the addition of lease liabilities should be taken into account when calculating their level of debt obligations, as bringing liabilities onto the balance sheet potentially negatively impacts leverage ratios and debt covenants.
What will this do to systems and controls of telecom operators? As a consequence, more sophisticated systems and more robust controls will be needed to track and report lease information in a timely manner. Applying the changed definition of a lease A contract will be defined as a lease if it enables an entity to control the use of an identified asset by directing the use of the asset and obtaining substantial economic benefit for a period of time.
Within the telecoms industry the judgement will focus on whether an asset is specified. An asset might appear to be explicitly or implicitly specified by it being made available. However, it will be necessary to establish whether the supplier has the ability to substitute an alternative asset during the period of the contract excluding any obligation to replace a defective asset and if there is a clear economic benefit for the supplier to do so.
Telecom equipment Delivery of some telecom services requires the installation of assets such as IT equipment, set-top boxes or satellite dishes. Since some of these assets are installed on customer premises, they might be implicitly specified.
Practically such assets might be easily substituted to deliver the same service. Capacity A capacity portion of an asset can be an identified asset if it is physically distinct or if it represents substantially all of the capacity of the entire asset.
For example, a specified dark fibre in a fibre optic cable can be an identified asset as it is physically distinct.
As such, this capacity portion would not meet the definition of a lease. The scope of the Standard specifically excludes some intangibles relevant to the telecom industry, in particular licensing arrangements e.
Entities are not required, but are permitted, to apply the Standard to rights-of-use of other intangible assets. Are there any recognition exceptions? The Standard permits lessees two exemptions from the recognition requirements which may be considered relevant to the telecom industry: Leases with a lease term of 12 months or less and containing no purchase options Leases of underlying assets which have a low value when new.
In the telecoms industry assets such as mobile phones and set-top boxes would generally be considered low value. Lessees can elect to continue to apply existing operating lease accounting to such leases by expensing the rental cost on a straight-line basis.
Are there reliefs at the date of adoption? As noted above, one of the areas of judgement in the telecoms industry is whether a contract is in scope.
On adoption of the Standard, an entity is not required to reassess whether existing contracts contain a lease, but can choose to carry forward the existing assessment under AASB Interpretation 4, Determining whether an Arrangement contains a Lease as amended and AASBLeases.
This means that the Standard will only be applied to existing contracts that were previously identified as leases and new contracts entered into after the date of adoption of the Standard During transition an entity will have the option to apply the Standard retrospectively, but only if AASB 15 has also been applied.
Why early preparation is critical to telecom operators?
Because of this, together with the significant number of operating lease arrangements that telecom operators enter into, we strongly recommended that operators use the intervening period to analyse the new requirements, consider any wider implications and make any required changes to their systems, controls Early planning and establishment of implementation plans will be necessary to ensure the new requirements of the Standard are met in a timely and cost effective manner.
Where can I go for more information? If you would like to discuss any aspects of this report, please contact one of the below at Deloitte Australia: · Analysis.
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