Five minutes on SFTR reporting and leases

14 August
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SFTR reporting and IFRS 16 leases implementation dates are upon us. Michelle Price gives an update on what they mean for treasurers

SFTR reporting – or EMIR déjà vu?

The European Commission published the Securities Financing Transactions Regulation (SFTR) back in 2016, but implementation dates have only recently been announced. The regulation aims to increase transparency in the securities lending and repo markets, and requires firms to report their Securities Financing Transactions (SFTs) to an approved trade repository.

SFTs can be used to describe any transaction where securities are used to borrow cash, or offered as collateral for cash deposits. It does not include derivative contracts, which are already covered by European Market Infrastructure Regulation (EMIR), but does cover liquidity swaps and collateral swaps (which are outside of EMIR reporting). Implementation dates are being phased in: Q2 of next year for banks and investment firms, Q4 2020 for pension funds and Q1 2021 for non-financial counterparties (ie corporates).

Aside from corporates having to report their repo transactions, those corporates whose bonds or shares are used as collateral in the financial markets and who don’t currently have a legal entity identifier (LEI) may need to get one.

This is because a key provision of SFTR is that agent lenders were not considered as principals to the trade, meaning that the underlying client (for example, the corporate issuer) would need to be identified as the counterparty through an LEI. It is thought that currently only 30% of issuers globally have an LEI. A large percentage of collateral could be deemed ineligible to be used in any securities financing transactions, potentially reducing the volume of business and trading with some counterparties could be stopped through lack of an LEI.

In case you’ve missed this: leases

IFRS 16: Leases came into effect for companies’ annual reporting periods that began on or after 1 January 2019, replacing IAS 17. For many large multinational corporates, this has been a significant challenge, and for some sectors the impact is substantial. The top five industries identified by the IASB that will be significantly impacted by IFRS 16 are the airline, retail, travel and leisure, transport and telecommunications sectors.

Fundamentally changing the approach to leases, IFRS 16 removes the old distinction between operating and finance leases for lessees; all leases now go on the balance sheet. Depreciation on the asset and interest on the lease liability is recognised in the income statement, as with finance leases under IAS 17. Additionally, IFRS 16 establishes the rules on how to determine the discount rate to apply to the lease payments when bringing the asset and liability onto the balance sheet.

A key financial metric impacted is gearing because not only does IFRS 16 impact the amount of liabilities and assets that are recognised on the balance sheet, but it also changes the relationship between the amount of liabilities recognised on the balance sheet and the amount of balance sheet equity.

In the income statement, EBITDA will increase, as will operating profit. This may be offset to some extent by increases in interest expense, but this could have a knock-on impact on debt covenants, particularly those with interest cover requirements.

Finally, it’s also worth remembering that where the lease obligation is in a foreign currency, exchange gains and losses will arise on the full amount of the lease liability as exchange rates move. With high FX volatility in some currency pairs, the potential materiality of this shouldn’t be underestimated.

 

Relevant ACT articles worth revisiting:

Definitive guide to deriving IFRS 16 discount rates

IFRS 16 – what treasurers need to know about leasing

 

About the author

Michelle Price is associate director, policy and technical, at The Association of Corporate Treasurers

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