HLG - Hallenstein Glasson

[percy]

Lease liabilities are so dumb

I have brought up SCY thread.
This reminds me why watching lease liabilities is so important .

[Snoopy]

Yep, looks as though I made a mess of that.

Not necessarily

Quite complicated.

You are right about that

As far as I can see from Note 4.1 there are two components in lease liability payments in the cash flow statement; interest for the period and lease payments made.

Adding these two together equals the lease payments under financing in the cash flow statement in both 2021 and 2022.

They should be in operations not financing IMHO.

Thanks for pointing that out and do you agree?

Yes the big change with IFRS16 is that what was an ordinary business expense (rent) becomes (mostly) a finance expense and gets subsumed in the interest payment bill. As you have noted, however, it is not a straight 1:1 swap where what was formerly 'rent' all becomes 'one other thing'.

The rationale behind IFRS16 was because someone high up in the accounting profession in the US decided it wasn't transparent for a company to hide critical operational assets (in the case of HLG they require stores to sell their clothing from) off their balance sheets. In the case of HLG they superficially had 'no debt'. But that didn't include the millions of dollars in future lease commitments signed and sealed which meant that if sales stopped (like in a lockdown) such leases could potentially cripple the company.

So while the likes of Snow Leopard are being very helpful in pointing out your 'error', the likes of 'percy' are also right in that huge future rent commitments of retailers, (e.g. the cautionary tale of Smiths City), should not be ignored. I am currently wrestling with exactly this IFRS16 issue myself (again) on the VTL thread. You might want to check it out. And I am coming to the conclusion that there are least two 'correct' ways to present accounts like this.

SNOOPY

[BlackPeter]

Lease liabilities are so dumb

Are "dumb liabilities" the opposite of "smart money"?

... always learning ...

[Rawz]

Why does a lease go under the a finance expense and why call it interest. I understand it all but why did they have to make it harder and confusing. If you are going to change something make it easier.

It’s going to constantly trip people up

[percy]

Why does a lease go under the a finance expense and why call it interest. I understand it all but why did they have to make it harder and confusing. If you are going to change something make it easier.

It’s going to constantly trip people up

When I am looking at annual reports and trying to work out ratios I take leases out.[as well as intangibles]
However, the fact retailers are highly leveraged must be realised.
Even if a company such as HLG are thought of being debt free ,it is a possible trap,for those who fail to take lease commitments into consideration.

[Snow Leopard]

Conceptually ( long word for the day ) rental/lease agreements are now the purchase of a right to occupy/use which is paid for up front, financed with a 100% loan from the landlord/whomever, and which is repaid in full over the term of the agreement.

The fact that the right generally depreciates linearly and the repayment of the 'loan' is interest heavy at the start created these interesting 'discrepencies' in the accounts on the transition .

Hope that helps

[Muse]

Prior IFRS 16 lots of investors used to take the rental expense out of EBITDA, capitalise it and add it to debt, and look at the new debt/EBITDA ratio for gearing, and I dont know we needed a whole new accounting standard to do what was before a relatively easy adjustment. But I can see the merit as it relates to retail or anyone who makes heavy use of operating leases.

One thing to watch out though are for retailers who give mini updates saying how quickly EBITDA has grown year on year, particularly if they are rolling stores out quickly, as its an incomplete and misleading snapshot in time that doesn't include rental expense. NPAT is king for retail. Although NPAT can even vary from a pre ifrs 16 basis to a post 16 basis, but not usually by enough to think too much about it.

[Muse]

Prior IFRS 16 lots of investors used to take the rental expense out of EBITDA, capitalise it and add it to debt, and look at the new debt/EBITDA ratio for gearing, and I dont know we needed a whole new accounting standard to do what was before a relatively easy adjustment. But I can see the merit as it relates to retail or anyone who makes heavy use of operating leases.

One thing to watch out though are for retailers who give mini updates saying how quickly EBITDA has grown year on year, particularly if they are rolling stores out quickly, as its an incomplete and misleading snapshot in time that doesn't include rental expense. NPAT is king for retail. Although NPAT can even vary from a pre ifrs 16 basis to a post 16 basis, but not usually by enough to think too much about it.

for avoidance of doubt not referring to HLG in the above - they are a good sort who let the numbers speak for themselves.

[DarkHorse]

Prior IFRS 16 lots of investors used to take the rental expense out of EBITDA, capitalise it and add it to debt, and look at the new debt/EBITDA ratio for gearing, and I dont know we needed a whole new accounting standard to do what was before a relatively easy adjustment. But I can see the merit as it relates to retail or anyone who makes heavy use of operating leases.

One thing to watch out though are for retailers who give mini updates saying how quickly EBITDA has grown year on year, particularly if they are rolling stores out quickly, as its an incomplete and misleading snapshot in time that doesn't include rental expense. NPAT is king for retail. Although NPAT can even vary from a pre ifrs 16 basis to a post 16 basis, but not usually by enough to think too much about it.

Great point - the concurrent popularity of EV/EBITDA as a valuation metric is making a lot of companies look cheaper than they are; easy to fall for that, especially with debt free companies.

Another trap is companies trumpeting positive operating cashflow - really misleading when lease payments are a cost of doing business.

It's a shame they couldn't find a way to require lease liabilities to be declared on balance sheets without messing up the P & L and cashflow statements.

[Waltzing]

the darkhorse here is the KIWI .... its more a dead horse at the moment and all retail in NZ might be stuck on a heavy track...

Rating agencies say they cant see the horses for the track in NZ at the moment... who ever shorted KIWI was on to a Winner...

dont expect intellectual PHD accountants to care about actual valuations...