The new AASB16 Standards and Subleases - What you need to know
Our last newsletter discussed the upcoming new leasing standards, AASB16 Leases and how it will affect your business. During a recent workshop with Carmen Ridley (Board member of AASB), the impact of the new standard on a lessee’s Balance Sheet, Income Statement and Cash Flow Statement was highlighted. There are however additional matters that need to be considered as a result of AASB16. For example, what if you have entered a sublease arrangement? Will the new standard impact your business differently and what should you do about it?
A sublease is where an individual or business enters an arrangement to lease to a third party an already leased asset while the original lease contract is in effect. The original lessee is referred to as an intermediate lessor or sub-lessor while the ultimate lessee (the person using the asset) is referred to as the sublessee. AASB16 requires the sub-lessor to account for a head lease and a sublease as two separate contracts and therefore both the lessee and lessor accounting requirements must be applied. This can result in complex reporting requirements and differences starting.
Firstly, the sub-lessor must determine whether a sublease is a finance lease or an operating lease, then accounts for the sublease as follows:
If the sublease is an operating lease, the intermediate lessor retains the lease liability and the right-of-use asset relating to the head lease in its balance sheet. This means that during the term of the sublease, the sub-lessor recognises depreciation charges for the right-of-use asset and interest on the lease liability. The lease income from the sublease is also recognised over the period of the operating lease.
If the sublease is classified as a finance lease, the sub-lessor derecognises the right-of-use asset relating to the head lease at the sublease commencement date. Instead recognising a lease receivable as the net investment in the sublease. Any difference in value between the right-to-use asset and the lease receivable is taken to the P & L immediately. The sub-lessor continues to account for the lease liability relating to the head lease in its balance sheet, representing the lease payments owed to the head lessor.
Should there be a make good provision, the intermediate lessor would still need to record a liability for this.
In the cashflow statement the intermediate lessor will disclose the lease principal inflow as an investing activity and the liability reduction as a financing activity.
If this isn’t complex enough, just assessing whether your sublease is a finance or operating lease becomes more difficult in situations where the whole asset is not subleased (e.g. a portion of real estate for a portion of the head lease term).
So, what can you do? Well, it’s often best to seek some specialist advice so that the right standards can be applied to suit your current person or business situation. Not only can this save you the considerable administrative burden of accurately calculating your lease liability, but it can help structure your assets minimising taxation and other business costs.
Should you have any questions about how these changes affect you please contact us or speak to your ESV engagement partner on 02 9283 1666. Your dedicated team will offer a practical approach to implement AASB 16.