The new accounting standard for leases, which will take effect in Singapore by January 2019, is expected to negatively impact landlords and tenants of commercial and industrial properties, according to a report from PricewaterhouseCoopers (PwC).
It revealed that the current leasing standard (IAS 17) will be replaced with the revised leasing standard (IFRS 16), which was published by the International Accounting Standards Board (IASB) in January 2016.
For tenants, IFRS 16 would increase their leverage ratios and reduce returns from assets, as nearly all leases will have to be recognised as “right of use” assets with corresponding lease liabilities.
“In a recent PwC study on the impact of the new lease standard on tenants across all industries and sectors, it was found that 53 percent of entities surveyed will see an increase in their debt of over 25 percent,” stated the report, which was co-authored by PwC Singapore’s Yeow Chee Keong and Chen Voon Hoe.
But retail tenants are expected to be the most affected, as the new standard will nearly double their leverage. It will also raise their operating costs, due to its additional requirements on disclosures, contract and data management.
In addition, tenants will need to separate the lease components from the non-lease components, such as service charges.
“Retailers in Singapore are already facing pressures on their operating models, and this clearly is something retailers need to prepare for,” noted the report.
Although there are no changes to how landlords account their leases as they will continue to be categorised as investment properties under IFRS 16, they will still feel a ripple effect, thanks to their clients.
As only unavoidable lease payments will be reflected on balance sheets, tenants may prefer shorter tenures with an option to renew or to incorporate higher variable elements, such as the retail industry’s turnover rent under their leasing contracts, to reduce the amount of leases taken into account on their balance sheets.
The report stated: “This may in turn adversely impact the key performance indicators (KPIs) for many landlords, including shorter weight average lease expiries, uncertainty in asset yield and volatility in cash flow.”
Landlords are likely to also receive request for additional support services from their customers, especially small and medium enterprises (SMEs) that lack the capability or expertise to correctly record leases under IFRS 16.
“Such support services may become part of the landlord’s responsibility, leading to higher operating costs, which may not necessarily be recoverable in the light of the current competitive leasing environment,” PwC added.
Cheryl Marie Tay, Senior Journalist at PropertyGuru, edited this story. To contact her about this or other stories email firstname.lastname@example.org