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Big Changes in Lease Accounting

Changes Lease Accounting

Do you lease business premises, have leased office equipment or operating leases?

Get Ready For Big Changes!

There is a change in the wind that may have gone largely unnoticed for a lot of businesses.

The new accounting standard on leases is likely to have a significant impact on the financial statements of many businesses when it becomes applicable. For a number of businesses this is from the 1ST July 2019.

What is the change?

The Australian Accounting Standards Board (AASB) has made changes to the definition of lease accounting to fall in line with International Accounting Standards.  Under AASB 16 (the new Accounting Standard) with Leases this means the removal of the distinction between operating and finance leases with most leases now coming onto a business’s balance sheet.

The AASB 16 changes are designed to give a more accurate representation of the financial position of the business by fully reflecting all its liabilities, and provides more useful information in financial reporting for investors, shareholders, and financiers.

AASB 16 will potentially have significant impacts on entities which may not always be immediately obvious at first sight.

Key changes in lease accounting:

  • Businesses will now include the costs of use of the leased asset and the associated benefits on their balance sheet. This typically includes the leasing costs of Premises/Office Equipment/Leased Assets etc.  Previously as an operating expense, those amounts will now sit below the EBITDA line as amortisation and interest.
  • The profile of an expense will change. Rather than being a straight line rental expense, there will be more expensed in early years and less in later years, impacting earnings profiles.
  • These changes will also potentially cause increases in the financial of the business such as Earnings before Interest, Tax, Depreciation and Amortisation (“EBITDA”). Rather than an operating expense, there will now be a movement of expenses below the EBITDA line which has a range of associated issues.
  • In addition to the possible financial reporting anomalies, the right of use asset will be non-current whereas the lease liability will be split between current and non-current.

So what should a business consider?

We are advising clients to seek advice from their Accountant to understand how these changes to the accounting standard affects their businesses ( as a result in the inclusion of a lease liability and a right of use asset on the balance sheet) by identifying the types and extent of lease contracts and assessing which ones will be impacted.

Some items to consider:

  • What issues will these changes have on the financials around working capital with a partly current liability funding a non-current asset?
  • What impacts will these changes have on Bank Covenants? (If your business has bank covenants?) –If companies are not proactive about approaching their financiers they could breach a bank covenant.
  • Will my company now qualify as a large proprietary company with the inclusion of right of use assets on the balance sheet increasing total assets and potentially requiring audited financial statements to be lodged?
  • Is there anything that we need to do prior to the first reporting period?

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