Our Thoughts

Countdown to IFRS 16 – focus on retail

The recent spate of hot weather in the UK is a reminder that the year is disappearing quickly, and with it time for businesses to ensure compliance with IFRS 16, the new lease accounting standard, which comes into effect on 1 January 2019.

In our last blog on this topic, I highlighted how occupiers could manage the transition to IFRS 16. The majority of businesses will be affected by the new lease accounting standard, with one report estimating that companies had placed as much as $3tn of operating lease obligations ‘off balance sheet’ (Bloomberg, 2017). In particular, the retail sector will see a profound and long-standing impact from IFRS 16.

Recent research from BNP Paribas Real Estate shows that the first quarter of 2018 proved one of the most turbulent periods in recent years for the retail sector, with Toys’R’Us and Maplin going into administration, closing 105 and 211 stores respectively and resulting in the loss of a combined 5,500 jobs. Building on several bumpy years for retailers, 20 companies are reported to be failing so far this year, affecting 1,256 stores (Centre for Retail Research, 2018).

For those high street retailers still operating profitably, these new lease accounting standards bring significant challenges, including what is potentially the biggest upheaval to retailers’ financial statements ever seen. With so many business pressures, it is therefore unsurprising that many retailers are voicing concerns about having the right procedures in place to ensure compliance.

The impact of IFRS 16 on retail is likely to be materially greater than from for other sectors. Retailers in general tend to have more leases on average than other sectors. One area where lease liabilities may arise are from historic sale and leaseback transactions, which in the past were used as a method of ‘off balance sheet’ financing. These will appear on balance sheets from 1 Jan 2019, so retailers may choose to reconsider their strategy with respect to holding or selling off freehold assets in exchange for leases.

A second example would be in the delivery of certainty and consistency around business performance when communicating with different stakeholders. In particular, retailers may face challenges as they report the impact on their debt profile. Those who are bucking the trend and expanding (particularly those expanding rapidly) may, ironically, be disadvantaged by taking on new leases under the new standard. Conversely, those who are in difficulty could appear to be in a better position.

BNP Paribas Real Estate Occupier Solutions is advising many retailers about their IFRS 16 compliance programme. Each retailer comes with different concerns and operating contexts. Many want to check they are far enough progressed in their readiness, planning or execution, while others are finding that tougher trading conditions require tough business decisions to be taken affecting all business areas from HR to real estate strategy. Those going through major business transformations such as mergers, acquisitions or divestment activity may have further considerations. However, regardless of the context, occupiers will need to have collated all the relevant data from different sources, analysed it in line with the accounting standard and presented to their auditors in a timely fashion.

Whether you are looking for strategic advice or consultancy to minimise the risks presented by IFRS 16 compliance to your specific business circumstances, reviewing your current readiness plan, seeking alternatives for value release, considering additional resources to execute your readiness programme, or seeking a solution to manage your potentially extensive lease data, we can help you – please do get in touch.

Tom Bolland
Head of UK Occupier Solutions
BNP Paribas Real Estate
+44 (0) 207 338 4145
Rob Williams
Head of Retail Agency and Development
BNP Paribas Real Estate
+44 (0) 20 7318 5153