Application of the Updated Lease Accounting Standard – AASB 16: What You Need to Know as a Business
The revised lease standard “AASB 16 Leases,” will mean significant changes for businesses that need to comply with accounting standards within their financial reports.
The majority of leases, both operating and finance, will now need to be brought onto the balance sheet.
AASB 16 Leases is the updated accounting standard that changes the way in which many companies account for leases in their financial statements. AASB 16 Leases was issued by the Australian Accounting Standards Board (AASB) and is effective for reporting periods beginning on or after 1 January 2019 i.e. year ended 31 December 2019 and year ending 30 June 2020.
Will this Update Impact Your Business?
For many businesses, leasing is a vital necessity of their commercial activities, as it allows a business to gain access to their assets whilst minimizing vulnerability to the risks associated with the ownership of assets.
The AASB 16 Leases will impact most Australian businesses that have finance and/or operating leases of property, including your rented premises, motor vehicles, manufacturing and other equipment.
AASB 16 Leases will cause the majority of leases of an entity to be brought onto the statement of financial position. There are limited exceptions relating to short-term leases and low value assets which may remain off-balance sheet.
If you do not have a lease as an identified asset of your business, then there is no contract and therefore the updated Lease Accounting Standard AASB 16 will not apply to your business.
What are the Changes under AASB 16 Leases?
The main changes under the new standard will be:
- An increase in recognised assets and liabilities (right-of-use assets and liabilities recognised);
- Timing differences – more lease expense will be recognised in the early periods of a lease, and less in the later periods;
- A shift in lease expense classification from operating expenses to financing costs and amortisation (e.g. moving below measures such as operating profit, EBITDA or EBIT);
- For entities that present cash flows – allocation between cash from operations and financing activities will change.
AASB 16 Leases: What do Management Need to Consider?
A number of aspects of the application of AASB 16 Leases will require the exercise of judgement – particularly in respect to the definition of a lease and the assessment of the lease term. Management should consider the following key questions:
- Do you know which of the entity’s contracts are, or contain, leases?
- Are your systems and processes capturing all of the required information and capable of monitoring leases and keeping track of the required ongoing assessments?
- Have you considered the practical expedients within AASB 16 Leases which can be used on transition?
- Do you know what discount rates you will be using for your different leases?
- Have you considered the impact of the changes on your financial results and position?
- How will you communicate the impact to affected stakeholders?
- Have you planned when you will consider the tax impacts?
- Have you considered whether your leasing strategy requires revision?
Entities with a 30 June financial year end who are required to prepare financial statements that comply with the accounting standards will need to consider this updated accounting standard for the year ending 30 June 2020.
Should you have any questions in relation to the application of the AASB 16 Leases, or if you require assistance with your 30 June 2020 financial statements, please contact our Audit and Assurance team at Walter Allan Hall or use the Contact Us button below.