Are you ready for the new lease standard?

As new accounting standards come into force over the next two years, property companies need to understand the implications for their businesses, says Moore Stephens’ director Ross Sicuro.

From 1 January 2019, a new Australian Accounting Standards Board standard will start to influence leasing decisions.

AASB 16 Leases will require companies to bring most operating leases on-balance sheet.

The new standard removes nearly all off-balance sheet accounting, and redefines commonly-used metrics, such as gearing ratios and earnings before interest, tax, depreciation and amortisation, or EBITDA.

According to Australian Securities Investment Commission, the new standard is “expected to have the greatest impact on financial reporting since the adoption of International Financial Reporting Standards in 2005”.

From a landlord’s perspective, AASB 16 Leases will have little direct impact on the treatment of leases.

However, industry analysts suggest it may influence negotiations with new tenants.

“AASB 16 Leases will put downward pressure on lease terms, potentially reducing weighted average lease profiles and potentially long-term income security for landlords,” says Urbis’ national director Matthew Cleary.

“Negotiations with tenants with a significant number of leases may become a little tougher in the years ahead,” he adds.

Property companies need to get an early understanding of the impacts the new standard will have on their business, Sicuro adds.

“Understanding the implications can help you to identify and eliminate potential issues, and minimise compliance risk,” he says.

Over the past 12 months, Moore Stephens has been developing a methodology to help its clients, and can provide detailed analysis of the impact that AASB 16 will have on a client’s leasing commitments.

“This will enable directors to meet their obligations by informing the market and shareholders of the impending changes and to choose the transitional option that best suits their business,” Sicuro says.

The secret is preparation, Sicuro says. “Plan early to meet your regulatory obligations and to protect your business interests,” he says.

Originally appeared on Property Council Australia

Information provided in this article is general in nature and does not constitute financial advice. You should consult your financial planner prior to making any investment decisions.