Effective for annual reporting periods beginning on or after 1 January 2019, a new leasing standard (AASB16) will apply. Operating leases and Finance leases are currently not included on the balance sheet; however the new treatment will mean that all leases are treated the same way and are to be included on the balance sheet together with a lease liability. For lessors, the finance and operating lease distinction remains basically unchanged.
What you need to know
The new standard will require all lessees to show a lease liability and a corresponding right-of-use asset for all leases on their balance sheet. At the beginning of the lease, the leased asset is recognised on the balance sheet of the lessee and a corresponding liability is also recognised. Over the duration of the lease, the leased asset is depreciated, and an interest expense is calculated based on the outstanding lease liability.
The new reporting standard will change key financial metrics such as gearing ratios, asset turnover and EBITDA. Assets and liabilities will both increase and profits will likely be lower at the beginning of the lease and higher towards the end.
It is imperative for companies and their directors to become informed in relation to the new standards to meet their regulatory obligations and protect their business interests.
In readiness for the adoption of the new reporting standards we recommend:
- identifying all the contracts that may be characterised as a lease arrangement under the new standards;
- ensuring you have the relevant data collection capability to capture the additional data required under the new standards;
- determine whether new and/or additional lease commitments should be considered or purchased outright; and
- ensure Boards and key stakeholders are educated on the new standards.
If you have any questions or need some assistance in this area, please contact our Property team.