New Lease Accounting Standard IFRS 16

What effect will the New Lease Accounting Standard have on businesses?

In Australia most businesses undertake some form of leasing activity. This can be renting an office or leasing finance vehicles and equipment.

To date a number of these lease arrangements have been classified as operating leases. As an operating lease they have not been recorded on the balance sheet of the business. Instead they have been recorded as an expense of the business.

The new accounting standard IFRS 16 Leases will operate from 1 January 2019. This will essentially eliminate the accounting distinction between finance and operating leases. Causing previously off-balance sheet arrangements onto the balance sheet.

What is the impact of this change?

This change will in most cases increase both assets and liabilities on the balance sheet and may impact bank covenants such as Debt/Equity ratios.

The new standard will bring trillions onto balance sheets globally but putting it into practice has thrown up some complexities.

Under the new standard, future operating lease payments will be capitalised and included on the balance sheet as a right-of-use (ROU) lease asset and a corresponding lease liability. The asset will then be subject to depreciation, while interest will be recognised on the lease liability over the lease term.

What to consider in the lead up to this change?

 

If you have leasing liabilities it is worthwhile having a chat with your Accountant to see what impact if any the coming changes may have on your financials.  If applicable consider revising any bank covenants likely to be impacted.

Check out our Lease Options Page or call 02 9453 0300 to discuss.