Firms with leases to report increased borrowings and finance cost under new accounting standard

Companies that have a higher number of leases are likely to report increased borrowings and finance costs across the board with the adoption of new accounting standards from April 1.
With SLFRS 16 coming into play, leases are included under assets as a balance sheet item. Leases are no longer considered an operational cost as per the earlier practice and get amortized under the new standard.

As a result, borrowings and finance costs of companies tend to go higher.

For example, John Keells Holdings PLC last week reported a spike in borrowing and finance costs for 1Q20 as the firm adopted SLFRS 16 Leases from April 1, 2019.

As at April 1, 2019, JKH recognized lease contracts to the tune of Rs.28.4 billion under right of use assets category in the balance sheet, which had been previously classified as operating leases under LKAS 17.

“The group has lease contracts for various items such as lands, offices, warehouses, retail stores and vehicles. 

Property leases are the major asset included in the right of use assets category, typically made for in between 5 to 99 years of lease term and have extension options,” the notes accompanying JKH’s June quarter interim accounts said. 

“On adoption of SLFRS 16, the group recognized lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of LKAS 17 Leases.