Indian Accounting Standard 116 won't affect bottom line, says HUL

Company says operating margins will improve due to new accounting treatment for leases

The country's largest consumer goods company, Hindustan Unilever (HUL) said on Tuesday there would be no impact on its bottom line on account of the introduction of the new accounting standard for leases.
 
The Indian Accounting Standard (Ind AS) 116, which became effective on April 1, sets out the principles for recognition, presentation, and disclosure of leases. Experts said the new standard removed differences between financial and operating leases, putting all leases on the balance sheet, thereby, improving transparency.
 
For consumer goods firms, a lease is taken for trucks, warehouses, and co-packing facilities, as against retail companies that operate stores on lease for a long duration (above 10 years). However, unlike retail firms, the duration of leases was shorter — mostly under five years — for consumer goods companies, said sector experts.
 
HUL said in a conference call that most of its leases were 1.5-2 years long and there would be some volatility visible in its books of accounts, given that earnings before interest, tax, depreciation and amortisation (Ebitda), which is operating profit, will be optically higher under the new standards.
 
"Since all leases will now be recognised on the balance sheet of the lessee, the earlier accounting treatment of taking it as an operating expense in the profit and loss (P&L) account will no longer continue. So, Ebitda and Ebitda margins will improve," said Suman Hegde, group finance controller and head (investor relations) at HUL.
 
The company said it saw a 100-basis-point improvement in Ebitda margins based on an impact assessment of the FY19 profit and loss statement. Experts, however, said the new accounting standard mandated firms to account for the lease in the P&L statement via depreciation and interest costs, impacting profit before tax (PBT).
 
“Depreciation and interest costs will surge because a lease will now be shown as an asset as well as a liability. An asset will attract depreciation, while on the liabilities side, the lease will be part of the gross debt for which interest will have to be paid,” said Kaustubh Pawaskar, senior research analyst at Sharekhan.
 
HUL said the impact on PBT was negligible and that there was no impact on cash flows because of the increase in depreciation and interest costs.