Proposed accounting rule change would put leases on balance sheet as debt

The rise of online shopping, discount-obsessed consumers - when it comes to trading challenges listed retailers have their fair share.

And there's a new one appearing on the horizon.

Through a rule change put forward by the International Accounting Standards Board (IASB), it's looking likely that retailers such as The Warehouse Group, Kathmandu, Pumpkin Patch and Hallenstein Glasson will soon have to bring leases onto their balance sheets for the first time, where they will be recognised as debt.

Retail operators will need to expense theoretical amortisation and financing costs instead of recognising rent payments as costs incurred, according to the Australian Financial Review.

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The AFR says this will increase earnings before interest, tax, depreciation and amortisation (ebitda) but weigh on pre-tax and net profits because amortisation and financing costs will exceed rental payments, particularly in the case of fast-growing retailers with a higher proportion of new leases.

It's an accounting challenge that bricks-and-mortar retailers' online competitors won't have to contend with, as they don't lease retail sites.

Todd Beardsworth, of New Zealand's External Reporting Board (XRB), the Crown entity responsible for implementing financial reporting standards, said it was "almost certain" that the IASB standard on lease accounting would be adopted in this country, possibly at the beginning of 2018. It is expected to be implemented in Australia at the same time.

According to a Morgan Stanley report cited by the AFR, the impact on retailers will vary from business to business.

But the effects will be "considerable" through increased gearing levels and reductions of returns on capital.

The report, which covered ASX-listed stocks, said dual-listed outdoor clothing and apparel retailer Kathmandu - as well as JB Hi-Fi, Flight Centre, Woolworths and Wesfarmers - would face a medium impact from the changes.

Those in the high-impact category included Myer, Harvey Norman and Super Retail Group.

A Morgan Stanley report said Harvey Norman would face high impact changes. Photo / Janna Dixon
A Morgan Stanley report said Harvey Norman would face high impact changes. Photo / Janna Dixon

Tax hit

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The almost $26 million tax bill facing about 13,000 New Zealand investors in BHP Billiton seems rather absurd.

It's the result of the Anglo-Australian mining giant's move to structure a demerger of assets into a new company, South32, in the form of a dividend.

The transaction is a straight split of capital - shareholders will receive one South32 share for each BHP share they own - and no cash is being returned to investors. But in the eyes of the law a dividend's a dividend and subject to tax.

Craigs Investment Partners estimates the tax will amount to about A70c per BHP share, implying a A$24.5 million ($25.7 million) tax bill from the 35 million shares owned by New Zealanders.

"Australian law enables tax relief in these circumstances, but our initial advice is that New Zealand has no equivalent provisions and neither is there any discretion allowed in the tax treatment," says Shareholders Association chairman John Hawkins.

The association approached the Inland Revenue Department in an attempt to get the BHP demerger tax waived, but doesn't appear to have been successful.

Hawkins said the situation sent the wrong message to investors who were trying to provide for their retirement.

"Many countries recognise that regardless of the description, demergers are effectively a capital transfer, and they provide taxrelief either partially or in full," he said.

"It's about time New Zealand looked after its own investors and savers and modified the legislation to promote long-term positive outcomes."

He's got a point. If the Government wants investors to broaden their horizons away from property into other asset classes, such as equities, situations like these don't provide much encouragement.

Hawkins said the association would pursue the issue with the Government.

Revenue Minister Todd McClay had not provided a response to questions by last night's deadline.

Selling time?
Could Mighty River Power come in for some selling following this month's allocation of bonus shares?

Retail shareholders who participated in the firm's 2013 initial public offering will receive one bonus share for every 25 they own, up to a maximum of 200, on May 21.

That's provided they hold their shares in the same registered name until May 14.

Craigs Investment Partners head of private wealth research Mark Lister said it was possible that some investors might sell up after receiving their bonus stock.

"Naturally there will be a few that have been waiting for this," he said. "Basically anyone who was wanting to sell some MRP [shares] for whatever reason over the last few months would have held off."

However, Lister said any resulting share price weakness "won't be massive".

Mighty River shares closed at $3.01 last night, a 20 per cent gain on their $2.50 issue price but 15 per cent below their $3.55 record close of January 28.

Genesis savaged
Genesis Energy shares have taken a hammering since the company slashed its full-year earnings forecast on Wednesday following customer losses and a drop in wholesale electricity prices.

The firm expects earnings before interest, tax, depreciation, amortisation and other fair value charges to be in the range of $330 million to $345 million, down from a prospectus estimate of $363.4 million.

Genesis shares fell almost 8 per cent to close at $1.99 on Wednesday, before losing further ground yesterday to finish up at $1.95.

The stock's really come off the boil since hitting a $2.40 record close in March, although it remains well above the $1.55 listing price.

Incidentally, Genesis shareholders who bought in the IPO received their bonus shares - one for every 15 they own, to a maximum of 2000 - late last month. That could have influenced some investors' decision to offload shares after Wednesday's downgrade.

Harbour Asset Management portfolio manager Shane Solly said the Genesis sell-off was another reminder that the so-called gentailers were "companies with operating risk - not bonds".

Spooky timing for Twitter debut
ANZ chief executive Mike Smith made his Twitter debut this week, sparking some tongue-in-cheek Aussie media speculation that he might have jinxed the social network.

Not long after his first tweet, Twitter stock plunged 18 per cent as the San Francisco-based firm reported revenue that missed analysts' forecasts.

Michael
Michael "Mike" Smith, chief executive officer of Australia & New Zealand Banking Group Ltd. (ANZ), reacts during the Bloomberg Address in Sydney, Australia, on Wednesday, April 15, 2015.

Apple shares also reportedly fell after Smith posted photographs of himself testing an Apple Watch.

The bank boss, who had more than 1300 followers by yesterday afternoon, has become one of the few ASX 100 CEOs to join the micro-blogging service.

It's a similar situation on the NZX 50, which ANZ's also a component of.

Xero's Rod Drury is very active on Twitter, as is the newly appointed boss of Diligent Board Member Services, Brian Stafford.

Spark chief executive Simon Moutter is also tweeting, but that's about it.

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