The new leases standard will bring the majority of leases on balance sheet from 2019, being one of the most significant changes to financial reporting since IFRS adoption.
Effective for periods beginning on or after 1 January 2019, AASB 16 / IFRS 16 removes the concept of operating and finance leases for lessees, replacing it with a single accounting model. Property and equipment leases previously recognised off-balance sheet will be accounted for as right-of-use (ROU) assets with associated lease liabilities, bringing more transparency about an organisation’s lease commitments whilst changing financial metrics such as return on capital and EBITDA.
Implementing the new leases standard is expected to pose financial and operational challenges, especially for organisations that lease large numbers of assets, hold long-term or complex leases, or have service contracts with embedded leases. Many organisations are not yet well progressed in implementing the standard, despite the effort expected to apply the accounting change.
For organisations with many operating leases spread across numerous geographical regions, identifying leases is likely to be a huge undertaking. Moreover, original estimates of an organisation’s lease population may be understated as embedded leases in service contracts may not have been clearly identified under the old standard given the accounting for operating leases and services was not substantially different. Examples of contracts that convey the right to use an asset for a specified period of time (which therefore may contain a lease) include service contracts (including IT services), dedicated supply agreements, advertising, and construction contracts. The identification of these types of leases will often be the first step in an organisation’s implementation plan, requiring cross-functional teams and experienced accounting personnel to perform time-intensive contract reviews.
Leasing data in existing systems is unlikely to address the data requirements of the new standard. Therefore, relevant lease data will need to be extracted from lease agreements, analysed, entered or updated in the system, and then validated and monitored throughout the lease term. Significant assumptions and judgments will have to be made at transition (given several measurement transition options available (PDF 602KB)) and reassessed when there is a change in assumptions or at least each reporting period date. Organisations will need to ensure that their implementation plans address design and implementation of system changes, which can take longer than a year to successfully implement.
This is not a basic accounting exercise; for example:
If organisations underestimate the total implementation effort, funding requests for 2017 and 2018 activities may not cover the cost of implementation. In order to meet the requirements of AASB 16 by 2019, organisations should develop a robust project plan and allow for the cost of implementation in 2017 and 2018 budgets.
ASIC released a statement on 16 December 2016 outlining its expectation that companies should disclose the impact of the three new accounting standards (AASB 9 Financial Instruments, AASB 15 Revenue and AASB 16 Leases) in their upcoming financial reports. For the new leases standard, companies are expected to disclose this information for financial years ending on or after 31 December 2017.
We provide a range of services to help with your transition to AASB 16, including:
For a summary of the key requirements of AASB 16 and further guidance of the factors to consider in your implementation project refer to our brochure.