How The New Accounting Rule Will Impact HUL’s Earnings

Hindustan Unilever Ltd. expects the new accounting standards to boost operating income at India’s largest consumer goods maker as it changes how lease expenses are recognised.

Under the new norm, Ind AS 116, leases will follow a uniform model—with the exception of low-value and short-term leases.

Earlier, under Ind AS 17, they were classified into two categories: operating and financial leases. The method of accounting was different for both.

• For an operating lease, a company recognised expense under ‘other expense’ category in the profit and loss account.
• For the financial lease, it created an asset and liability based on present value of payment to be made during the lease period. A company on a yearly basis would recognise depreciation on assets and finance costs on liability, impacting profit.

Ind AS 116 removes the distinction. Barring low-value and leases of less than a year, the rest of lease expenses would be recognised through depreciation and finance cost.

If HUL applied Ind AS 116 to its FY19 profit and loss account, its lease expense of Rs 400 crore would now add up as Rs 345 crore in depreciation and Rs 60 crore in finance costs, reducing its profit before tax by Rs 5 crore, the company said in a conference call. But its earnings before interest, depreciation, tax and amortisation would rise by Rs 400 crore and its EBIT would increase by Rs 55 crore.

• On its balance sheet, the new accounting norm would result in an addition of Rs 657 crore in assets and an increase of Rs 725 crore in its liabilities.
• On its cash-flow statement, return on capital employed will increase by 2 percent.

HUL adopted the new standard from this financial year and will not restate its profit and loss account for previous fiscals. But it will provide comparable numbers for previous quarters while reporting its numbers in 2019-20.