Many companies, including some of the top players, have moved from fixed rentals to a real-estate cost structure built around the actual top-line.
The new lease contracts essentially mean that the retailer would pay a minimum rent and the remaining would be pegged to the sales it generates from the facility.
Many top retailers in India have either moved to this model, or are looking to opt for the new variable rent option.
This would lead to a downward shift in the liabilities of the retailers as well, say accountants.
“Companies in the retail and consumer sector have been modifying their lease contracts and seeking rent concessions due to the Covid pandemic,” said chartered accountant Sumit Seth. “These are typically in the form of waiver or deferment of rent, and there may also be a move from fixed rent to variable rent linked to sales. This will directly impact the financial results, and especially the liability side could see a reduction.”
Under the new accounting standards IndAS that became applicable from last year, companies are required to record leases on their balance sheets resulting in higher liabilities and corresponding right of use assets.
This means that if a company has seen the lease getting impacted or some of leasing contracts redrawn, it would impact the balance sheet of the company.
In most cases when companies move to the percentage of sales model, their leases come down, and so does the liability in their balance sheet.
The pandemic has had a huge impact on the way Indian companies are audited. In several cases, the auditors have had to take precautions and base their opinions on predictions made by economists and experts. One such issue has been around exceptional items.
“Exceptional items” attributed to Covid-19 crisis have increasingly become a sore point between companies and their statutory auditors, as a large number of companies have started using Covid-related adjustments to mask dismal business results delivered in this period, say people in the know.
Going forward, a large number of companies and banks are set to see a new matrix in their financial statements — “EBITDAC”, or earnings before interest, tax depreciation, amortisation and Covid, ET first wrote on June 6.
While preparing financial results, some companies are reporting certain items like loss of revenue and increased costs in a special category — exceptional items — so that the profit figure looks better.
The auditors are also facing issues in cases where companies have triggered force majeure to exit contracts.