AASB 16 Leases – get it right as it may have a large impact on your financial reportingJuly 19, 2019
AASB 16 ‘Leases’ is applicable to reporting periods beginning on or after 1 January 2019, which means 30 June 2019 Interim Reports will be impacted. If an entity has many leases (e.g. a chain of retail outlets) the impact on the statement of financial position could be significant. If an entity has no leases (e.g. an entity uses its own land and buildings or plant) other than for shortterm leases and low-value assets (e.g. photocopiers and
computers of 3 years or less) then there will be no impact on the statement of financial position.
The headline change being the removal of the distinction between operating and finance leases for lessees with most leases now coming on balance sheet. AASB 16 will potentially have significant impacts on entities which may not always be immediately obvious at first sight.
The new leasing standard is likely to affect almost every business to some extent. The important thing with the new standard is to be proactive and to be prepared
Under the current accounting standard, the obligation to make future payments under an operating lease arrangement is not included on the balance sheet even though the company is committed to those future expenditures. The concern of many stakeholders was that this did not give an accurate reflection of the company’s true financial position.
The changes to the accounting standard (which apply to reporting periods beginning on or after 1 January 2019) will result in the inclusion of a lease liability and a right of use asset on the balance sheet.
In other words, the business will now include the costs of use of the leased asset and the associated benefits on its balance sheet.
The AASB 16 changes give a more accurate representation of the financial position of the business by fully reflecting all its liabilities, and provides more useful information in financial reporting for investors and shareholders, but there is a downside.
The changes will substantially increase the level of commercial and financial reporting risk given the increase in complexity and the hidden issues which may arise on implementing the new standard.
Firstly, the new standard will change the profile of the expense. Rather than being a straight line rental expense, there will be more expensed in early years and less in later years, impacting earnings profiles.
It will also cause potentially large increases in metrics such as EBITDA. Rather than an operating rental expense, there will now be a movement of expenses below the EBITDA line which has a range of associated issues.
In addition to the possible financial reporting anomalies, the right of use asset will be non-current whereas the lease liability will be split between current and non-current.
This mismatch could potentially cause issues with working capital with a partly current liability funding a non-current asset.
There may also be substantial impacts with bank covenants which could lead to possible breaches if companies are not proactive about approaching their financiers.
Another impact could be that more companies will now qualify as large proprietary companies with the inclusion of right of use assets on their balance sheet increasing total assets and potentially requiring audited financial statements to be lodged.
Companies may potentially have large balance sheet changes which will need to be explained to investors, financiers and shareholders.
The attached guidance is useful >>>Adoption of AASB 16 for Interim Reports
Subscribe to our newsletter
- IPO Watch Mid-Year Report July 24, 2020
- PCP extends platform company eligibility July 22, 2020
- PCP share facilitation company Sharetech now open for business July 22, 2020
- How to deal with COVID-19 in the reporting season July 13, 2020
- financial reporting news and insights June 30, 2020
- End of Year Tax Planning Guide – 2019/20 June 02, 2020
- COVID-19 | Reporting deadlines further extended for listed and unlisted entities May 14, 2020
- COVID-19: Signing contracts electronically just got easier for companies May 06, 2020
- ASIC reports on corporate finance regulation – July to December 2019 April 20, 2020
- JobKeeper Payment has now been legislated by Parliament April 14, 2020
- ASIC to provide additional time for unlisted entity financial reports April 09, 2020
- Coronavirus stimulus package to include jobkeeper payments March 31, 2020
- New ASIC guidelines for upcoming AGMs and financial reporting requirements in light of COVID-19 March 25, 2020
- Initial public offers: Relief for voluntary escrow arrangements and preprospectus communications February 24, 2020
- Financial Services Royal Commission Draft Legislation February 04, 2020
- 2020 IPO Watch Report January 30, 2020
- The execution challenge for a new decade January 21, 2020
- Australian Government delays implementation of Open Banking after facing practical issues with the new Consumer Data Right January 13, 2020
- ASIC reports on corporate insolvencies 2018–19 December 19, 2019
- ASIC Financial reporting focuses for 31 December 2019 December 06, 2019
- ASIC releases report on mining and exploration initial public offers December 05, 2019
- Final ASX listing rules reforms – summary of key changes November 12, 2019
- tokenized securities are the next big megatrend of the blockchain revolution November 06, 2019
- CDR privacy safeguards: OAIC guidance released November 06, 2019
- Financial Services Council releases guide to help stop elder financial abuse October 31, 2019
- Final ASX listing rules reforms October 11, 2019
- ATO celebrates 20-year milestone of regulating self-managed superannuation funds October 10, 2019
- ASIC reports on corporate finance regulation – January to June 2019 September 23, 2019
- Does your SMSF investment strategy meet diversification requirements?’ September 19, 2019
- ASIC’s Corporate Plan 2019-2023 August 28, 2019
- Government announces Hayne Royal Commission implementation timetable August 26, 2019
- Countdown to AGM August 20, 2019
- ASIC enforcement update January to June 2019 August 18, 2019
- ASIC Warns On Insider Trading In Small Cap Miners August 03, 2019
- APRA proposes stronger rules on remuneration August 01, 2019
- AASB 16 Leases – get it right as it may have a large impact on your financial reporting July 19, 2019
- FATF releases 2019 guidance on virtual assets: 9 key points and global changes July 18, 2019
- Major financial reporting changes and other focuses June 17, 2019
- ASIC issues guidance to licensees to protect against share sale fraud June 16, 2019
- ASIC consults on proposals to maintain investor protections by restricting retail offers of ‘stub-equity’ in control transactions June 04, 2019
- ASIC releases market integrity report May 31, 2019
- ASIC updates information for businesses on ICOs and crypto-assets May 30, 2019
- Succession Planning May 14, 2019
- Large proprietary company thresholds increased April 16, 2019
- Australia passes new laws regulating streaming of abhorrent violent material by ISPs and other content providers April 15, 2019
- Federal Budget Review April 03, 2019
- ‘Mind the gap’ – consumers confusing different types of financial advice March 28, 2019
- Accounting and Financial Reporting Standards update March 27, 2019
- ATO & Council of Financial Regulators report on SMSF borrowing arrangements March 22, 2019
- fourth edition of ASX Corporate Governance Council’s Principles and Recommendations officially released. February 27, 2019
- ASIC consults on updating its responsible lending guidance February 14, 2019
- Final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry February 02, 2019
- ASIC reports on 2018 annual general meeting season January 31, 2019
- new mandatory wording requirements for service providers under the Australian Consumer Law January 30, 2019
- Protecting your PPSR Registration from Expiry January 30, 2019
- Findings from 30 June 2018 financial reports January 25, 2019
- Western Australia expands its duty base December 18, 2018
- Australian startup and young technology company funding report 2017/18 December 01, 2018
- proposed changes to the ASX Listing Rules December 01, 2018
- Plans to reduce the financial reporting burden for Australian proprietary companies. November 27, 2018
- The SEC reiterates its position on the issuance, trading and investment in digital assets November 23, 2018
- Three companies combining with a common vision of providing coordinated solutions for unlisted companies November 20, 2018