Small companies may become large as a result of additional assets recognised under the new lease standard

All Australian business leases will be subject to new accounting rules from January 1 2019, which could have significant impact on an entities overall financial position.

Cate Pozzi, Senior Manager Network Risk, at William Buck Chartered Accountants and Advisors, says under the new rules a small proprietary company meeting the gross assets test may mean they become a large proprietary company – even with the Australian Government’s proposed changes to raise financial reporting thresholds for proprietary companies by 2020.

“The Australian Accounting Standards Board have released new standards for all entities who have any form of lease. The changes are significant, containing new definition of lease, that will impact on financial statements, even with the government’s proposal to increase reporting thresholds” says Cate Pozzi.

“Under AASB 16 Leases, the current distinction between finance and operating leases will no longer be applicable for lessees, rather, lessees will apply a single accounting model for all leases,” Cate says.

“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, which may ultimately impact on the statement of profit or loss, statement of financial position and statement of cash flows.”

“What this means is the right-of-use assets may well see a smaller company meet the gross assets test for being a large proprietary company – raising concerns for not just accountants and auditors, but also CFOs and boards.”

Cate says entities will need to act now, by looking at all their systems and processes including performance measures based on profit and bank loans and covenants.

“While there are some exemptions, they are limited. Entities must recognise assets and liabilities arising for all leases,” Cate Pozzi says.

“Entities will need to look at the way they renumerate staff – for example bonuses – and its effect on EBITDA and recalibrate those performance measures based on profit,” says Cate.

“Given that there will be changes to the tangible or intangible asset, working capital or gearing ratio, bank or loan covenants may also need to be amended.”

Cate says the changes to lease accounting definitions and thus accounting standards under AASB 16 Leases, will apply to financial years beginning on or after January 1, 2019.

“The main implications are that while cash flows won’t have changed, how they will be classified in the statements of cash flows will. For the statement of financial positions, net assets will be affected and for the statement of profit and loss interest and amortisation expenses will now be included rather than a lease expense and the expense is higher at the beginning of the lease rather than being straight-lined,” Cate Pozzi says.

Cate says these changes will also affect sale and leaseback accounting and the transfer of assets in a sale.

“There are transition options, the main thing for entities to remember during the transition is to apply the same accounting rule consistently to all leases in which they are a lessee,” Cate Pozzi says.

ENDS

For More Information on the Lease Accounting Standards click here

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