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New Accounting Standard AASB 16 (Leases) Part 1


Commencement Date: 
Reporting Periods commencing on or after 1st January 2019

AASB 16 is applicable to the following businesses:

Purpose of the standard

To better reflect an entity’s leasing obligations and ‘right-to-use’ assets by including all lease arrangements on the balance sheet.

AASB 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases (excluding those that are exempt). For certain business, this change is likely to significantly affect financial statements.

Exemptions

AASB 16 provides exemptions for:

What AASB 16 means for lessees:

Financial impact on the lessee

The impact of the new lease requirements may impact the profitability of an entity. This is because, at the start of the lease period, depreciation and interest will be higher than the rent expense. In comparison, depreciation and interest will be lower than the rent expense when the lease is nearing the end of its term.

Also, assuming all else remains equal, Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) will increase. The reason being that depreciation and interest – both of which are excluded from EBITDA – are recognised instead of rent, which is included in EBITDA.

Impact (or lack thereof) on the lessor

A lessor will continue classifying leases as operating leases or finance leases; each of which is accounted for differently.

Industries and assets most impacted by AASB 16 

The entities most impacted by AASB 16 are those with the propensity to obtain high-value operating leases, such as:

 What is a lease asset? 

Lessee accounting

 Recognition

When AASB 16 (Leases) comes into effect, a lessee shall henceforth recognise a ‘right-of-use’ asset and a lease liability.

Measurement  

Initial measurement of the ‘right-of-use’ asset

When the new leasing standard becomes applicable, a lessee shall measure the ‘right-of-use’ asset at cost. The cost of the ‘right-of-use’ asset shall comprise:

Initial measurement of the lease liability

At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date.

The lease payments included in the measurement of the lease liability comprise;

Subsequent measurement

After initial recognition, the lessee generally measures ‘right-of-use’ assets classified as property, plant and equipment (PPE) or investment property using the depreciated cost model or the revaluation model.

Transition to the New Standard

We recommend that businesses adjust retained earnings for leases not previously recognised when the new standard first applies rather than restating comparatives.

Presentation in the Financial Report

Statement of financial position

However, ‘right-of-use’ assets that meet the definition of ‘investment property’ must be disclosed as part of investment property.

Income statements

Cash flow statement

Areas of business AASB 16 will likely impact 

Actions required 

Ashfords can advise you on how this new leasing standard will directly and indirectly impact your business’ financial statements. We are also able to provide you with the resources necessary to help you ensure your business complies with AASB 16.

Contact Ashfords on (03) 9551 2822 to arrange a meeting to discuss what AASB 16 means for your business.


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