AASB 16 Leases is Live – Act now

AASB 16 Leases became operative on the first of January. If you haven’t thought about it it’s time you did. Implementing Leases isn’t easy.

More than 340 pages of authoritative material and four related interpretations replace the 30-year-old AASB 117 forerunner. Ninety pages cover the standard itself, and 57 give examples. There are 90 pages of bases of conclusions and 103 of effects analyses.

To say the least, the new Leases presents a significant challenge for CFOs.

Simply put, AASB 16 eliminates the classification of leases as either ‘operating’ or ‘finance’ for lessees. There is now a single lessee model, which requires a lessee to recognise on the statement of financial position a right-of-use asset and a liability for leases with terms of more than 12 months unless the underlying asset is of low value.

Simple in theory but not in practice.

Some basic questions will get you thinking. What is a lease under AASB 16? Where is my lease documentation? Is it complete? What other agreements are there that could be a lease? What data do I need to capture? What does a ‘make good’ liability mean? What practical expedients are there? What is the lease term? How are separate components identified and accounted for? Which transitional method should I use? What discount rates should be used? Do I have to account for my sub-lease as a lessor? Do ‘peppercorn’ leases for not-for-profits have transitional relief? What software options are available?

The questions abound.

The CFO to-do list includes:

  • Get your operating lease commitment disclosure right under existing AASB 117 Leases
  • Acquire the AASB 16 knowledge and ‘peppercorn’ transitional relief (AASB 2018-8 Amendments to Australian Accounting Standards – Right-of-Use Assets of Not-for-profit Entities)
  • Conduct an initial assessment of AASB 16’s effect (for example, size threshold, bank covenants, and strategic business decisions), seek audit input, and prepare governance papers and seek the board’s approval
  • Educate other affected individuals within the organisation
  • Perform a ‘stocktake’ of your lease portfolio – obtain original lease documents and understand leasing arrangements
  • Consider software solutions for lease management
  • Field-test the impact of AASB 16 on a few contracts
  • Evaluate sufficiency of accounting processes and controls
  • Develop a detailed accounting policy that, inter alia, addresses the decisions made
  • Update the financial-reporting template for AASB 16 presentation and disclosures as well as for peppercorn leases
  • Quality-assure your decisions and continue the dialogue with your auditor, and
  • Communicate what is coming to stakeholders.

Don’t forget that AASB 15 Revenue from contracts with customers and AASB 1058 Income for Not-for-profit entities also apply to 31 December balance dates for the first time.

None of them is easy nor are they set and forget. They will pose ongoing challenges at reporting dates.

 

For more information about the AASB 16 Leases, please contact our audit team on 1300 363 866.