Are you ready for the new Leasing Standard AASB 16?
The introduction of AASB 16 Leases may have much greater implications than many professionals would have initially thought. This Standard will likely effect a large number of organisations and then in turn effect an even larger number of users of the financial reports who will need to understand this change in order to make investment or similar economic decisions.
The effective date of this Accounting Standard is for annual reporting periods beginning on or after 1 January 2019. It may be early adopted if an entity also chooses to early adopt AASB 15 Revenue from Contracts.
What is the change?
This Accounting Standard was born out of some very high profile corporate collapses, where previously entities could enter operating leases that were carried off-balance sheet. The new Accounting Standard requires entities to now capitalise most of these previous operating leases meaning an asset and a liability will now be recorded on the balance sheet for each lease. The two exceptions to recording operating leases on the balance sheet are:
(i) Low value assets – individual leased assets up to a value of US$5,000; and
(ii) Short term leases – leases for 12 months or less
What impact will this Accounting Standard have?
Bringing operating leases onto a balance sheet could change a number of ratios including gearing and current ratios. It will also change reported results of organisations that report on a headline basis i.e. listed companies that report a headline EBITDA result. Under the previous reporting system EBITDA would’ve included an amount for operating leases. Under the new Accounting Standard the operating lease cost won’t be included and instead an amortisation amount will have been included in the Statement of Comprehensive Income. For the purpose of an EBITDA calculation the amortisation charge will now be excluded. For some organisations this could have quite a large impact on reported results or on banking covenants if their banking covenants have not been realigned with the new Accounting Standard.
Changes in the interest component and revaluations of assumptions that were used in the original calculation of the value of a lease could also affect an organisation’s statement of comprehensive income as these won’t be applied uniformly.
Effects on not-for-profit organisations
Where a lease has been entered into by a not-for-profit organisation (and where AASB 1058 Income of Not-for-Profit Entities is applied) the lease is required to be recorded at fair value. Some not-for-profit organisations have leases in place for significantly less than fair value, or even for $1 for 99 years (a peppercorn lease). In these cases a significant accounting entry will be required to initially record this lease which is then amortised over the life of the lease.
What should you do?
Organisations should be reviewing their lease register, ensuring it is up-to-date and looking at what impact recording leases on the balance sheet will have on ratios and any external covenants. Where practical some organisations may consider their options and either purchase assets outright or use one of the two exceptions above (signing low value leases or short term leases).
If you’d like to learn more about the new standards and standard changes, please contact one of our Audit Specialists, complete your details below and we’ll be in touch or give us a call on 03 9835 8200.