AASB 16 is a new accounting standard that impacts the way operating leases are accounted for on a company’s balance sheet. Your accounting systems and processes should have started catering for the changes well ahead of the 1 January effective date, due to the possible impacts.
What has changed compared to AASB 17?
AASB 16 supersedes the previous standard, AASB17. Under AASB17, a company balance sheet does not need to include the company’s obligation to make future payments on an operating lease even though the future expenditure was committed. This means that balance sheets may not accurately reflect a company’s financial position.
Why was AASB 16 introduced?
AASB16 was introduced to fully reflect a company’s liabilities by providing transparency of leasing activities, a lessee’s financial leverage and the capital employed. The new standard should enable more accurate and understandable financial reports for investors and shareholders, particularly for comparing the positions of companies that borrow to buy assets versus companies that lease assets.
Who is affected?
AASB16 is likely to affect almost every business to some extent. The new standard will have a significant impact on companies who are ‘lessees’ of assets (eg premises, vehicles) and compliance is mandatory for those companies who prepare General Purpose Financial Reports. For the ‘lessor’ there is no change.
When is AASB 16 effective?
For companies with a 31 December year end, the new law will apply to annual reporting periods commencing 1 January 2019, and for those with 30 June Year End, the first period applicable will be from 1 July 2019.
What is the likely effect on your business’s financial reporting?
The change will increase the level of complexity and risk in financial reporting due to issues which may arise on implementing the new standard. For the first year of implementation, companies may potentially have large balance sheet changes which will need to be explained to investors and stakeholders. The likely expected effects include:
- Balance Sheet – increase in assets and liabilities, decrease in equity
- Income Statement – Increase in EBITDA and finance costs, decrease in front-end lease expenses and profit before tax
- Cashflow Statements – Increase in operating cash flow, decrease in financing cash flow
These effects may also create future issues with working capital, bank covenants, lease agreements and the requirement to lodge audited financial statements.
What businesses need to do to transition to AASB 16
If you have not yet transitioned to the new standard, the first step is to determine whether you have leases where there is a contract/agreement between two or more parties that creates enforceable rights and obligations, and secondly, the value of the affected liabilities and assets. We recommend that you seek professional advice.
How Accru can assist
Accru Felsers has been assisting clients to make a smooth transition to the AASB 16 new lease standard for the past year. We can help identify the leases and contracts that will be impacted, the extent of the impact, and establish appropriate accounting systems and templates for applying AASB 16. We can also provide tax and advisory support to help you best prepare for the change. Please contact us if you’d like to discuss your situation.
See our articles on AASB 15 Revenue Recognition and the AASB 15 five step model by the Sydney audit team.