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Hi Dave,

You're right. This is another problem with AASB 16...I

In any event, I'm of the understanding anecdotally that most VVA leases are structured with fixed increases, not CPI. I think this evidenced by the difference between pre and post AASB 16 NPAT/EBIT?

Hi @PeregrineCapital

It's possible they have a "3% or the CPI whichever is greater" type clause in the lease in which case they would recognise the 3% at inception as the minimum step up, but AFAIK, AASB does not allow you to make assumptions about what the indexation might look like. Probably with good reason.

Just checked an accounting text and it has this...

Hi Dave,

Yep sorry I gave it a google and you're right. Another reason AASB 16 is a pain in the ass.

I'm of the understanding (anecdotally) that most VVA leases are structured with fixed increases, not CPI. I think this evidenced by the difference between pre and post AASB 16 NPAT/EBIT?

You've lost me a bit there Peregrine. How would the pre/post AASB16 noticeably change based on the structure of the leases?

I agree with you about AASB16. Major PITA.

Hi Dave,

https://www.bdo.com.au/en-au/content/accounting-news/accounting-news-august-2018/ifrs-16

In this example, depreciation + interest expense > annual amount payable ($135,000 once you factor in the incentive) at the beginning of the lease. Once you get out to years 4 and 5, the opposite is true.

In the above example, the rental is a flat amount each year. However VVA would typically have a fixed annual 4% escalator in the rent payable under a lease they sign. These increases mean the ROU and lease liability would be higher at the beginning of the lease, and more interest (and depreciation maybe?) would be booked at the start of the lease.

My belief is that VVA would, on average be in the earlier stage of their leases and that this annual escalator further exacerbates the difference in key PRE and POST AASB 16 metrics that VVA reports. Although I'd definitely take your point that the difference is pretty minor?

Am I making any sense? ????????????

Yeah, I just think there are way too many leases with varying terms at various stages of maturity etc that the difference wouldn't be too significant. It is simpler, imo, to just work out the cash rent paid (reduction in property lease liability + interest expense on property leases (I think you have to use the slide above to get that interest cost) = cash rent) and adjust EBIT accordingly. You can also then just toss in a price escalator when you walk it forward. Bah AASB16 is the absolute dumbest thing to come out of accounting.

My interest in the difference wasn't so much for val purposes,more just to verify there's no funny business going on. Do you know of any other reasons why there could be such a sizeable a difference in figures?

The cash rent is approx. $37mil, very close to the variance in expenses outlined above. For val purposes I reconstruct the cashflow statement, not P+L.

Nah, doesn't look to me like any shenanigans to me, just a business with very high fixed costs. Which is why it's so hard to cancel gym memberships.