Changes to Leases Accounting Treatment arising from AASB 16 Leases - Are you ready?
Written and accurate as at: Aug 16, 2019 Current Stats & Facts
If you prepare Financial Statements for purposes other than preparing your tax return then the changes to the classification and measurement of leases will likely affect you. This change in reporting is for Lessees, the treatment for Lessors has not really changed.
The main change from this standard is that operating leases which were previously not on the balance sheet will now have to be bought to account on the balance sheet. This is similar treatment to a finance lease.
If your organisation has a lease agreement for buildings, vehicles or even photo copiers this change will affect you.
The cash flow and tax treatment of leases will not be affected. This change will ensure Leasees 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.,
Transition to the updated standard may take one of three approaches:
The application of each method can be done on a lease by lease basis with a summary of each below;
· 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.
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 changes are effective from 1 January 2019 from the start of the 1st annual reporting period. If your annual reporting date is 30 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.
If you need assistance with implementation, the team at LBW can assist you based on your specific needs and circumstances.