Important changes to lease agreements

Do you work in a finance team, sit on a Board, or are you a business owner?

Do you need to report to ASIC or apply accounting standards in the preparation of financials?

If so, the best piece of advice you can receive this year is to check your leases.

The Australian Accounting Standards Board released a new standard that changes the way leases are defined and accounted for in financial statements, which is now in place.

Whereas historically, finance and operating leases were accounted for differently, this change means that one accounting method now applies to all leases.

Any form of operating lease – big or small – must now be recognised on the balance sheet, whether it be for motor vehicles, premises, stock, machinery or equipment. However, there are some exceptions for assets of low value.

While this transition to a uniform accounting model might not sound like a big deal – it could have significant impact on your entities overall financial position.

That’s because this model will recognise that at the start of a lease, the lessee must obtain both a right-of-use asset, an intangible asset and a lease liability.

In other words, it may result in an increase to your intangible assets; it could change your debt levels and it may impact on the profit and loss.

As an example, in some instances, your small proprietary company will now meet the gross assets test and ultimately become a large proprietary company.

This change coincides with ASIC changing the thresholds for large proprietary companies, where you must now meet two of the following three criteria:

  • Consolidated gross revenue > $50m
  • Consolidated total assets > $25m
  • 100 or more employees

These changes will also affect sale and leaseback accounting and the transfer of assets in a sale.

While these changes will affect financial statements, there are other critical steps that will be required within the organisation – specifically involving the data collection and getting the right information to ensure your accounting statements are correct needs careful management.

This change is one which will need to be communicated across the whole organisation for two reasons – the first is that you may find your business has a significant number of leases which need to be collated. Secondly, these changes and the relevant accounting need to be worked through – such as the way you remunerate staff and its effect on profit, as well as bank covenants and loans. It may also mean assessment and modification to relevant systems and processes.

As auditors, the significant changes to the financial reporting landscape have been part of an ongoing dialogue for over a year. We have assisted many of our clients with this process – however, discussions with our broader networks reveals that many entities have not yet properly considered how these changes impact their financial statements or the time and effort required to comply.

It’s important to note that this a very time-consuming task. If you have not acted to comply with these changes, it’s critical you seek assistance. All entities including NFPs, private business or public companies who need to report to ASIC or apply accounting standards in the preparation of their financials must comply.

The change in accounting for leases is now in effect for 30 June balance dates (note the actual standard became effective 1 January 2019). For December year ends its 31 December this year. For June year ends its 30 June 2020.

You can a download a guide on how to comply with AASB16 Leases from our website. William Buck also have a Financial Reporting Resource centre with details regarding a range of Financial Reporting changes.

If you need further help, please reach out for assistance.