Good morning, everyone, thank you for joining us for our IFRS 16 information session. The purpose of this call is to provide a better understanding of the new accounting standard and of its impact on our financial reporting and results. You will find our presentation on our corporate website in the investor relations section under the heading Corporate Presentations. We will be referring to it throughout this webcast. The presentation, as well as an audio recording of this webcast, will be available on our website for a period of 30 days. Please remember that today's discussion may include forward-looking statements which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Our future results could differ from the information discussed today.
The information session will also be presented by Mr. Mathieu Brunet, Vice President, Finance, and Madame Julie Therrien, Director, Financial Reporting and Controls. Mathieu, you may begin your conference.
Thank you, Jean Marc. Good morning to all of you listening on the phone, and thanks for being with us this morning. I'll start the presentation from page three for those of you who are looking at it. As mentioned by Jean Marc, the purpose of the call is to discuss the impact on our financials from IFRS 16, which is a new accounting standard on lease accounting that now puts most operating leases on the company's balance sheet. It's important to note that since this is purely an accounting change, there will be no change to Couche-Tard's strategy. Also, we don't anticipate any impact on our cash balance, cash flows, or leverage capacity. However, we do anticipate impact on our financial statements.
Starting with the fiscal 2020 opening balance sheet, we will have a new liability and a matching asset and should see an increase in the range of CAD 2.4 billion-CAD 2.8 billion to both our total assets and total liabilities. On the income statement, we currently estimate the positive impact on EBITDA of CAD 400 million-CAD 430 million, and a much smaller negative impact on net earnings ranging from CAD 20 million-CAD 40 million. Certain KPIs, such as debt leverage ratios and returns measure will be affected, and we will talk about this a bit later on. Turning to page four, we will quickly go over the mechanics of the new accounting treatment, though we recognize that most of you should already be familiar with this by now. Starting with the income statement, the rent expense, which was treated as an operating expense, will now be eliminated and replaced with depreciation and interest expense.
Over the life of the lease, the total charge to the income statement will be the same as in pre-IFRS 16 accounting. In the short term, operating profit will increase since the depreciation expense will be smaller than the rent expense. Since the interest charge will be higher in the early years of the lease, net income will be impacted negatively at the start of the lease and balance out over time. Looking at the balance sheet impacts, operating leases will be transferred to the balance sheet via a right-of-use asset and an equivalent lease liability calculated as the present value of future lease payments. The new asset will depreciate on a straight line basis over the term of the lease, and the lease liability will decrease over time based on cash rent paid net of the interest expense.
On the cash flow statement, there will only be reclassification impacts, as a portion of the cash rent paid will flow through financing cash flows rather than operating cash flows. Turning to page five, some items fall out of the scope of this new standard for us. For example, any variable lease payments related to performance, volumes, and other such measures. As well, we have chosen to exclude rent for low-value assets and for leases shorter than 12 months, as permitted by the new standard. These will be expensed to SG&A as incurred and are not expected to be significant. Turning to page six, to apply the new standard, we had some options. We selected what we call the cumulative catch-up approach with a simplified right-of-use asset.
This methodology made sense for us because our business did not change significantly in fiscal 2019, as we did not make any acquisition or dispose of assets in any meaningful way. Under this approach, we will not be restating prior periods in our financial statements. The right-of-use assets will be equal to the lease liability on the opening balance sheet, and any existing balance sheet item related to lease accounting, such as prepaid rent, will be reclassified with the new asset. In the MD&A, in order to help analyze results, we will be estimating the impact on fiscal 2019 results as if the new standard had been in effect then. We will also be adjusting a few key measures in fiscal 2019, such as leverage ratios and ROC, to ease comparability.
Turning to page seven, this slide is simply a high-level overview of the impacts of IFRS 16 on our financial statement and certain KPIs. Of note, with regards to our performance ratios, ROC will decrease as a result of adding more assets to the balance sheet. Our adjusted leverage ratio also will decrease since debt was previously capitalized at a multiple of 8x, while the effective multiple resulting from the application of IFRS 16 is closer to 7x. Turning to page eight. Here we're showing what the impact of IFRS 16 would've been on fiscal 2019 income statement to help with modeling going forward. On the left side, we're starting from the reported numbers, pre-IFRS for fiscal 2019. The second column exclude the current accounting for IAS 17, sorry, the current or the former standard. The next column adjusts for the new standard.
We have the other column there that takes care of the treatment for sub-lease contracts under the new contract. You have there the impact of IFRS by line, with on the right side, the post IFRS P&L for last year. As you can see, the highlights there are a positive impact of about CAD 450 million to EBITDA as a result, and a negative impact to net income of about CAD 3 million. Turning to page nine. Same analysis, on the balance sheet. You see the highlights and the adjustments where we're adding in the assets, the right-of-use assets of about CAD 3 billion, with a net impact on total assets of about CAD 2.6 billion. On the liability side, we're introducing the concept of lease liability, both in the short-term section for CAD 405 million and in the long-term section for almost CAD 2.6 billion.
You also see that we're reducing some of our long-term debt lines to get the effect of the old standard out of our balance sheet. Again, on the liability side, about CAD 2.6 billion addition to liability on a net basis. Turning to page 10. Finally, this is another high-level view on the estimate of the impact on certain lines, including EBITDA, net earnings, and EPS. Again, EBITDA and adjusted EBITDA move favorably by CAD 415 million. Net earnings and adjusted net earnings would reduce by CAD 30 million. On EPS and adjusted EPS, we would expect an impact of around CAD 0.06 per share. Turning on page 11. Going forward, you can expect to see the new asset and liability on our balance sheet starting in Q1.
In our notes to the financial statements of Q1, we will be reconciling the current lease obligation to the prior operating lease commitments that were reported as at April 28th, 2019. We also want to remind everyone that the impact on earnings is not anticipated to be linear and that it should decrease as we move through the year. A simple extrapolation of the Q1 impacts could not be representative of fiscal 2020 full-year results. Just wanted to make sure that you were aware of that. Turning on page 12, that pretty much ends our presentation. We hope that this helps clarify the impact and the implication of IFRS 16 for Couche-Tard. We will now open for questions, if any.
At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Michael Van Aelst from TD Cowen. Your line is open.
Hi, good morning, Mathieu.
Good morning.
Can you give us an idea of the impact by division? I know you don't really split out EBITDA that way, but we try to, so how do you come up with that? How would we split it? Would it be pretty much just proportionate?
I don't have the information on hand, Michael, and I'm not sure it would be proportionate because I don't think our portfolio is necessarily proportionate. What I suggest is that we follow up on this later on.
What's your average lease term? With that in mind, when would you expect to transition from a negative EPS impact to a positive?
Average lease term, we typically have leases, especially in North America, that range from 5 years-15 years initially. We do adjust the lease term according to IFRS 16 standard, adding some options to our lease term for the sake of the calculations. Most of our lease include, not necessarily in the calculation, but in our agreement, several options for renewal so that we have enough optionality there. I would say initially, we like to get into 5 years-15 years lease term.
Five to 15 without the options?
Without the options. Usually, options bring us to maybe 40 years or so in terms of optionality.
Does that mean you're not going to really hit-- It wouldn't turn to a positive impact for a number of years, like many years to come?
Well, if you look at individual lease terms, yes. When you look at the entirety of our portfolio, I don't have the information. We didn't calculate the prospective impact of IFRS 16. Maybe that's something we can look at and revert back with comments on. I'm not sure if we can get there, though.
Okay. When you say that the impact in the quarters for fiscal 2020 is not going to be linear, are you just thinking about a very minor decrease as the year goes on, or is there some kind of swings for some reason?
It should be linear because the standard by itself is somewhat linear. I think the way to look at it is, if you look at our Q1 results and extrapolate, you could see the results are different than the numbers we've talked about today on an annual basis. I think we believe that the numbers we've shared today are more representative on a yearly basis than looking at it quarter to quarter.
Okay. Thanks, guys.
Your next question comes from Peter Sklar from BMO Capital Markets. Your line is open.
Mathieu, on page 10 of the slide deck where you give that high-level forecast of the impact on I'm not too sure. Is that just a summary of the detailed page you provided on, let me just see what page that is.
Page eight.
Yeah.
That's a recap of page eight. Yeah.
Okay. Could you just explain on page eight, the other column, sublease contracts, why does IFRS impact revenues?
We do lease or sublease of the properties we own or rent. IFRS 16 had some rules around how to account for this, and the column, other, is a representation of us applying IFRS 16 on the rental income that we have for properties when we lease or sublease.
Okay. That's all I have. Thank you.
Thank you, Peter.
Your next question comes from Vishal Shreedhar from CIBC. Your line is open.
Hi, Mathieu and Jean-Marc. I just wanted to know if you're giving any disclosure on either the discount rate that you use or the average lease life.
I'll refer to Julie, that can answer that.
Yes. In our Q1 financial statements, we're going to disclose, as required, the weighted average discount rates of our whole portfolio. In terms of lease term, we're not planning on disclosing anything for Q1, we're going to disclose it at the end of fiscal 2020. It's still similar to what we've disclosed in the past that our leases range from five years to 50 plus years. We might provide a little bit more detailed information, but it's still going to remain limited in terms of lease term.
Okay. I had another little more detailed question on slide eight. In the non-controlling interest line at the bottom of the slide, on the other column, you have minus CAD 15. Is that just netting out, I guess, the rent impact from basically your sublease contracts? Or, sorry, the depreciation and interest impact from your sublease contracts, or is that related to something else?
It's removing 80% of the impact from CrossAmerica Partners.
Okay. That's helpful. Thank you.
Welcome.
Your next question comes from Keith Howlett from Desjardins Securities. Your line is open.
Yes. Can you roughly break down your owned properties by market? Is it similar proportion in each of the three regions, or is it quite different by region?
No, it can vary by region. I don't remember if we report this in our annual information form. I think so. Maybe I can refer you to the AIF, Keith, and if you have more question on it, we can take it offline.
Okay. I realize this is an accounting change, but does anything in this affect your interest or ability to spin properties off in a REIT from your point of view?
No, I think spinning it off into a REIT has several consideration, but no accounting consideration. Contrarily to maybe in the past where you could spin off some assets in a REIT and not have those in the balance sheet anymore, I think IFRS 16 would bring back those assets to the balance sheet. That's the resulting effect. For us, spinning off into a REIT would be mostly a financial and business decision, not an accounting decision.
Thank you.
There are no further questions at this time. Mr. Ayas, turn the call back over to you.
Thanks, Julianne. Thank you all for attending the call. We look forward to speaking with you again when we report our Q1 2020 results in September. Have a good day, everybody.
Thank you.
This concludes today's conference call. You may now disconnect.