The new accounting standard for leases has recently been introduced. This has resulted in a change in the accounting treatment of leases which will affect your organisation if you have:
- Any type of operating lease agreement including but not limited to:
- A lease agreement for buildings,
- A lease agreement for vehicles or
- Even a lease agreement for photocopiers.
In this article, I will discuss the leasing standard, what the updates are, what they mean for leasees, and when it will take effect.
What is the AASB 16 Leasing standard?
The AASB 16 Leases standard has been effective from the start of 2019. The adoption date will differ between entities, for the majority within Australia, this will be from the 1st of July 2019 which is the start of the next financial period. The standard outlines that leasees are now required to recognise all operating leases on the balance sheet in their Financial Reports, except short-term leases and leases of low value assets.
What is the update to the AASB 16 Leases?
The cash flow and tax treatment of leases will not be affected. This change will ensure leases will be reporting the following;
On the balance sheet
- Right of Use Asset
- Lease Liability
On the profit & loss
- Depreciation Expense
- Interest Expense
The changes will affect most leases, with only a few exceptions including where a lease term is less than 12 months or is of low value.
What does the update mean for businesses?
It depends. There are three potential approaches that could be applied for the adoption of the new standard. The approach chosen may have implications for Dividend policy and Banking covenants. Careful consideration of the benefits and costs involved with each approach should be made when deciding on the appropriate method.
The application of each method can be done on a lease by lease basis with a summary of each adoption method below;
3 APPROACHES TO THE UPDATED STANDARD
- Full Retrospective – The most amount of work to implement. A full restatement of comparatives to recognise leases as though this change had always been in effect is required. As a result of the restatement, this method will affect the prior year Distributable Surplus.
- Modified retrospective approach #1 – Least amount of work to implement. No effect on equity for the initial adjustment at the start of the period. This is based on the remaining lease payments rather than the other approaches where there is a full recalculation based on the payments from the start of the lease
- Modified retrospective approach #2 – Full calculations required. The same as Full Retrospective, however, no change to comparatives, rather an adjustment will be made to opening equity.
When will the update take effect?
The changes are effective from 1st January 2019 from the start of the 1st annual reporting period. If your annual reporting date is 30th June then these changes came into effect from 1st July 2019.
As such, if you are preparing monthly or quarterly accounts for management, these accounts should now be reflecting leases on your balance sheet.
Conclusion
The new standard AASB 16 Leases has changed how leases are reported on the balance sheet and profit & loss statement. For this new accounting standard for leases, there are three approaches you can take to transition to the updated standard – Full responsive and two modified retrospective approaches. These updates are effective now and you should be preparing monthly or quarterly accounts reflecting these leases on your balance sheet.
Still not sure? Have a chat to your business advisor or accountant.
If you need assistance with implementation, the team at LBW can assist you based on your specific needs and circumstances. Please call (03) 5221 6111 for more information.
