09 April 2019

CFA Institute: New leasing standard - top ten considerations for investors

The CFA Institute has published a paper 'Leases: What Investors Need to Know about the New Standard'. This guide provides the top ten considerations for investors as they evaluate the impact of the change to the new standard.

CFA Institute, like many others, have worked with standard setters on this new rule for the last decade. Because US GAAP and IFRS have decided on different solutions and transition methods, investors need to carefully consider the impacts of the new standards on the companies in which they invest.  CFA Institute thought it was important to help investors navigate the changes ahead.  To that end, CFA Institute has prepared a guide to help investors understand the change they are about to witness.

CFA Institute has focused on top 10 considerations including:

1. The Basics – Helping investors understand the basics of the new US GAAP and IFRS standards and their differences.
2. Transition Methods – Explaining the methods and implications of transitioning to the new standards under US GAAP and IFRS – as well as the comparability challenge brought about by the differing methods.
3. Transition Impact Disclosures – The transition disclosures to expect, some examples to illustrate, and how investors should evaluate the transition impact.
4. Financial Statement Captions – The implications, and differences, of the new US GAAP and IFRS standard on financial statement captions. Including a quick illustration for those analytically inclined to visualize the effects and differences of the new standard on the income statement.
5. Non-GAAP Measures – The implications of the different US GAAP and IFRS treatment of leases on the most notable non-GAAP measures. Most importantly, alerting investors to the fact that net income will likely be lower for IFRS companies while measures of operating income such as EBITDA and EBIT will be higher than the past and relative to US GAAP companies.
6. Cash – Explaining how cash doesn’t change, but the statement of cash flows will change, for IFRS companies.
7. Ratios – An analysis of the implications, and differences, of the US GAAP and IFRS standard on solvency, liquidity, profitability, earnings per share, return on equity, performance and coverage ratios. The comparability challenges abound and investors need to understand them.
8. Disclosures – Why disclosures are more important than ever to investors now that the lease liabilities are measured in the financial statements. Considerations for investors as they analyze these new liabilities and value the company.
9. Industries Impacted – A quantitative analysis of those companies in the S&P 500 expected to be most significantly impacted.
10. Market Expectations – Consideration of how the market might react to the newly visible leverage.

Full article

Full guide

© CFA Institute