The proposed changes to lease accounting will
lead to companies reporting increased interest bearing debt,
leverage and earnings before interest, tax, depreciation and
amortisation (EBITDA), a new study reveals.

A study of 3,000 companies by
PricewaterhouseCoopers and the Rotterdam School of Management
showed that, based on the operating lease disclosures in the
companies’ financial statements, interest bearing debt will
increase by an average of 58 percent.

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“This is a cautious estimate as only the
impact of capitalising disclosed operating leases is quantified in
the research,” the study said. “The impact on companies’ debt can
be higher depending on the specific details in a final
standard.”

PwC’s study also shows that the impact on
financial ratios differs significantly per industry.

For example, for retail companies, the
reported debt balances are expected to increase by an average of
213 percent, and the leverage – calculated as interest bearing debt
divided by equity – will increase by an average of 64 percentage
points.

Companies’ EBITDA will also be affected, the
report added, since rent expense will be replaced with interest and
amortisation expense, which are below-the-line charges. On average,
companies will see an average increase in EBITDA of 18 percent.

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But the authors noted that “the economic
benefits of leasing will not change as a result of the proposed
lease accounting”.

Jason T Hesse