Tesco Advises That Adoption of New Accounting Standard to Impact Earnings, Indebtedness

British grocery chain Tesco (TSCO.L) advised that its diluted earnings per share and total indebtedness would change as a result of the adoption of a new financial reporting standard on accounting for leases during the current fiscal year.

The company, which is the UK’s biggest supermarket operator by market share, said that diluted earnings per share would decrease and total indebtedness would increase as a result of the adoption of IFRS 16 during fiscal 2020.

Profit before tax and diluted earnings per share before exceptional and other items will both drop by 152 million pounds ($196.4) and 1.39 pence, respectively, as depreciation and interest are expected to come in higher than the rent they would replace under the amendment, the group said in a statement.

“This is due to the relative immaturity of the group’s lease portfolio, with leases being around one-third expired on average,” the company said in a statement. “The proportion of EPS[earnings per share] dilution will reduce as the portfolio matures and, most notably, as underlying earnings increase.”

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The new arrangement would also see the retailer’s total indebtedness increase by 3.3 billion pounds to 15.50 billion pounds due to “lease extensions and contingent commitments being included and lease-specific discount rates being applied.”

In its fiscal 2019 results announced on April 10, the company had reported a decline in total indebtedness to 12.20 billion pounds from 12.28 billion pounds a year ago. Diluted earnings per share before exceptional and other items came in at 15.40 pence, up from 11.90 pence a year ago.

While sales and total cash flow are unaffected by the accounting change, operating profit excluding exceptional items and amortization of acquired intangibles would increase by 401 million pounds to 2.61 billion pounds as rent is removed and only part-replaced by depreciation, the statement noted.

The first accounts prepared under International Financial Reporting Standard 16 will be the 2019/20 interim results, to be published in October 2019, followed by the 2019/20 preliminary results, which will be released in April 2020.