AASB16 Leases: The New Standard

AASBLeases
7
May

AASB16 Leases: The New Standard

07.05.18

On 1 March 2018 we conducted a workshop with Carmen Ridley (Board member of AASB) on AASB16 Leases, the new Standard introduces a new model requiring lessees to recognise all leases on balance sheet, except for short-term leases and leases of low value assets.

These changes were issued by the Australian Accounting Standards Board in February 2016 and are effective for periods beginning on or after 1 January 2019 i.e. 31 December 2019 for December year ends and 30 June 2020 for June year ends.

AASB 16 will bring most leases on-balance sheet from 2019. All companies that lease assets for use in their business will see an increase in reported assets and liabilities.

To implement these changes entities will need a thorough understanding of the new requirements and their impact on an entity’s Balance Sheet, Income Statement and the Cash flow Statements.

At a basic level the workshop identified several implications that need to be considered, including:

  • Impact on gearing and loan covenants. Reported debt will increase due to lease liability recognised and a right of use asset will also be recorded in balance sheet.
  • EBITDA and EBIT will increase because there will be no operating lease expense included. Part of the lease cost will become interest expense and depreciation expense will also increase as depreciation will be recorded for right of use of assets.
  • Impact on remuneration schemes, including bonuses and share-based payment arrangements with operating performance criteria.
  • Existence of data, information systems and technical knowledge to calculate the impact and satisfy ongoing reporting requirements.

There will be a significant administrative burden for entities in capturing all the information required to calculate the lease liability and required disclosures, even with the exemptions for short-term leases or small leased assets. Lease agreements have various complex and inter-related elements that will need to be analysed across the portfolio of leases. Although the new standard is not applicable until 2019, a detailed analysis of its impacts is recommended now to make informed decisions.

In our next newsletter, we will cover the circumstance where an entity has entered into a sub-lease arrangement.