The impact of the new leases standard on the telecommunications sector
Telecommunication companies should not underestimate the potential impact of the new leases standard that applies from 1 January 2019.
The new leases standard will require companies to bring most leases on-balance sheet from 2019. For telcos, getting a complete list of leases will be a real challenge and a number of sector-specific arrangements will be affected, including:
A dedicated line may not be a lease if a supplier has substantive substitution rights that apply throughout the rental period. Assessing whether these substitution rights are substantive is highly judgemental and will be unique to each arrangement.
Further, if a line agreement structure is customised, then it may be difficult to determine who directs the asset’s use and, consequently, whether a lease could exist.
A lease may exist for a transmission asset if it is physically distinct. However, a lease can also exist for a capacity portion of a transmission asset that is not physically distinct, as long as the customer has the right to receive substantially all of the asset’s capacity. In this case, gathering sufficient information to determine whether a lease exists could be challenging.
Transmission asset arrangements may also comprise both lease and non-lease components. For example, if a designated space on a mobile tower is shared with other providers, one component (e.g. the space on the tower) may meet the lease definition, but not another (e.g. a shared cabinet). How lease components are separated will impact a telco’s KPIs and covenant metrics directly.
The standard features a variety of different transition options and practical expedients. Many of them can be elected independently of each other, and some can even be elected on a lease-by-lease basis.
This means that large companies could face a large number of possible permutations, making transition particularly challenging. If you haven’t already, start this process now as the transition approach you choose will have a significant impact on the carrying amount of net assets, and on trends in profit or loss in the post-transition years.
Read Accounting for leases is changing: What’s the impact on telecommunication companies? (PDF 561 KB) for more information on how IFRS 16 will affect telcos, and how we can help.
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