AASB 16 Leases - Are you ready?

AASB 16 Leases is part of the new accounting requirements becoming mandatory over the next two years. 

ASIC have highlighted that:

‘new accounting standards coming into force over the next two years are expected to have the greatest impact on financial reporting since the adoption of International Financial Reporting Standards (IFRS) in 2005.’
AASB 16 is effective for reporting periods beginning on or after 1 January 2019 (early application possible if AASB 15 Revenue from Contracts with Customers is also adopted early). 

The new leasing requirements have numerous transitional options and the changes will impact companies in a variety of ways, including:
 
  • Changing operating lease expenses from above the EBITDA line to below it (critical for calculating many business acquisition earn out payments)
  • Increasing both assets and financial liabilities
  • Changing key metrics such as Debt/Equity ratios and times interest earned
  • Moving some companies from small P/L to large P/L
ASIC Commissioner John Price said:

'We remind directors and management of the importance of planning for the new standards and informing investors and other financial report users of the impact on reported results.'

For companies and their directors, it is imperative they become informed now to not only meet their regulatory obligations but also to protect their business interests.

Over the past 12 months we at Moore Stephens have been developing a methodology and training our staff to assist you through this process.  We can provide you with a detailed analysis of the impact of AASB 16 on each of your leasing commitments including an impact statement of the transitional options available to you and what effect each of these will have on your Profit and Loss and Balance Sheet.  This will enable Directors to meet their obligations of continuously informing the market and shareholders of the impending changes and to choose the transitional option that best suits their business.

ASIC have stated that:

‘It is reasonable for the market to expect that quantitative information will be available and disclosed for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report.’

Take for example a typical office lease with the following conditions:
 
  • 15 year operating lease
  • Commences 1 July 2015 (30 June year end)
  • $120,000 p.a. payable monthly in advance
  • first 6 months rent free
  • estimated make good $100k at end of lease
  • incremental borrowing rate 8% p.a.
  • 4% fixed increase p.a. on each anniversary date
From a P&L perspective operating leases are typically expensed on a straight-line basis under existing requirements.  The new AASB 16 treatment will result in both a depreciation and interest charge impacting upon the P&L.  Depreciation is likely to be on a straight basis however interest is higher in the initial years.  This will have the effect of front loading expenses in the P&L which will reduce over the life of the lease.

On transition (1 July 2019) to the new AASB 16 the company may choose to either:
 
  1. Apply the standard as if it had always applied and restate the comparative year;
  2. Measure the lease liability at the present value of remaining lease payments and the right-of-use asset as if standard always applied (not restating the comparative year); or
  3. Measure the lease liability at the present value of remaining lease payments and the right-of-use asset at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position immediately before the date of initial application (not restating the comparative year).
Table 1 illustrates the very different results each of these transitional choices will make on the company’s financial statements.
 
Table 1

 
At Moore Stephens we have extensive experience in understanding how to apply AASB 16 to your business to ensure you meet the challenges outlined above.  Please feel free to call us at your convenience to discuss this opportunity. At Moore Stephens, we are here to help you through this process so that you can get back to doing what you do best – running your business.