Britain’s retailers look set to emerge as the most exposed to new lease commitments, according to analysis by Aptitude Software, a global financial software specialist.
The firm predicts that 90% of UK high street retailers will struggle to comply with the impending lease accounting standards (IFRS 16) which come into effect in January 2019. This is in part due to the sheer volume of leased assets across their businesses, including premises, delivery vehicles, machinery and IT equipment.
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, demanding a level of data collection, storage and lease accounting that was not previously required. Based on the new standard, all leases over £5,000 need to be disclosed.
Aptitude Software’s analysis highlights the retail sector as being particularly impacted as the value of leases compared with their total value is particularly high.
Ross Chapman, global marketing director of Aptitude Software, said: “A later start than January next year is going to stretch retail finance teams. Given the complexity, it is not surprising that many UK retailers are unsure of their lease liabilities. For large retailers, who may have more than a thousand outlets, the new leasing standards are a data nightmare.
“Finance teams will need to locate and sift through thousands of individual rental agreements, often buried in disparate systems and locations. We understand from our customers that the cost of a retail store front is enormous, and it is not unusual for 50% of a retailer’s company value to be represented by off-balance-sheet leases. These ongoing lease liabilities mean that retailers must shift very high volumes of low margin products to break even.
“In effect, many retailers are living beyond their means with huge lease liabilities.”
Lucy Newman, IFRS 16 audit partner at consultancy firm Deloitte, said: “IFRS 16 is probably the most significant change in accounting to affect non-financial services companies in the past 20 years. I work a lot in the retail sector and the pressure on margins is more than it’s ever been before. Coupled with the fact that property occupiers are likely some of the most heavily impacted by IFRS 16.”
According to the British Retail Consortium, it is not unusual for a large retailer to have between 5,000 and 10,000 leases including assets used within their stores and other properties, with an estimated minimum of 25 to 80 data points per lease.
