Leasing, as a means of accessing assets, of obtaining finance and of reducing an entity’s exposure to the risks of asset ownership, is becoming more and more important for many entities. As a result, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) initiated a joint project to develop a new approach to lease accounting.

On 13 January 2016, IASB issued IFRS 16 Leases. Australia has fully adopted this new standard and introduced AASB 16 Leases.

Application date

The new accounting standard will be effective for companies with annual reporting periods beginning on or after 1 January 2019. Early adoption of this standard is permitted. The transition period and comparative balances need to be considered.

Compliance Requirements – Lessee’s

Entity	Compliance
Tier 1 reporting entity	Full compliance with the standard.
Tier 2 reporting entity	Compliance with the measurement and recognition requirements. The AASB will determine the disclosure requirements through a separate process.
Non-reporting entity lodging with ASIC	Companies preparing special purpose financial statements and lodging with ASIC must comply with the measurement and recognition requirements of the standard (Refer to RG 85).

All ACNC registered charities should comply with the ACNC reporting requirements. In general, the ACNC requires reporting entities to submit general purpose financial statements with non-reporting entities permitted to lodge special purpose financials statements.

Compliance Requirements – Lessor’s

There are no changes in the requirements for accounting by lessors, which means that the distinction between operating and finance leases still remain.

Key Changes by the New Standard

• There is no longer a distinction between finance and operating leases for lessees
• Lessees record a right-to-use asset and lease liability on the balance sheet for all leases
• Depreciation and interest charges on leases will impact the profit and loss
• Impact of lease payments on the cash flow statement include:
• 1. payments of principal are recorded in financing activities
  2. payments for short-term leases and low value items expensed in profit or loss are disclosed in operating activities.

Leases Excluded from the Scope of AASB 16

The following types of leases (and subleases) are scoped out of the new AASB 16 requirements:

• Exploration leases for minerals, oil, natural gas and similar non-regenerative resources
• Biological assets (apply AASB 141Agriculture)
• Service concession arrangements within the scope of Interpretation 12 Service Concession Arrangements
• Licences of intellectual property of a lessor (apply AASB 15 Revenue from Contracts with Customers)
• Rights held by a lessee under a licensing agreement (apply AASB 138 Intangible Assets).

Recognition Exemptions

A lessee may elect not to apply the new standard for:

• Short-term leases, typically these are leases with a period of 12 months or less
• Leases for which the underlying asset is of low value, such as laptops or phones.

Industries Impacted

The new standard is expected to have a wide impact across many industries in particular those industries with numerous and/or high value leases. Those industries that use extensive land and buildings and valuable equipment will be strongly impacted. The following industries are particularly likely to be impacted upon:

• Property and construction;
• Government and Not-for-Profit sector;
• Retailers’ with multiple outlets;
• Education and training;
• Health and aged care;
• Mining;
• Manufacturing; and
• Real estate

Need help

Please feel free to contact us to discuss your situation if you think your business will be affected by the new standard. Our professional team is always willing to be in your shoes and provide tailored advice for your business.

Radlee Moller

P: 9683 5999

W: www.cibaccountants.com.au