The new leases standard requires entities that are lessees to recognise a right-of-use asset for the majority of their leases. This could result in a significant step up in the value of assets recognised on transition. This AASB 16 Check considers the impact of AASB 16 Leases on financial reporting obligations for proprietary companies under the Corporations Act 2001.
Let’s pose a scenario that prior to the date of initial application of AASB 16, a company had 30 employees, revenues of $60 million, and total assets of $10 million. It was classified as a small proprietary company under the Corporations Act 2001, and did not have to prepare or have its financial statements audited. The company leases warehouse premises to store its inventories, and two floors of an office building.
On applying AASB 16, the company recognises right-of-use assets for both of these leases. As a result, total assets increase to $20 million.
At the end of the financial year, the company has total assets of $20 million, revenues of $70 million, and 30 employees.
Question: Given the increase in total assets on application of AASB 16, does the company need to prepare financial statements for lodgement with ASIC?
Interpretive response: It is highly likely. The company now meets the requirements of a large proprietary company under the Corporations Act. The implication of this change in status is that generally a large proprietary company has financial reporting obligations under the Corporations Act, including a requirement to prepare and lodge audited financial reports with ASIC.
A proprietary company is classified as a large proprietary company where any two of the following conditions are met:
In November 2018 the Government proposed increasing these thresholds. Refer to our Reporting Update 18RU-004 Special purpose on life-support? for more detail.
A small proprietary company is not required to prepare financial reports unless it is foreign controlled, shareholders direct it to do so, or ASIC requests financial reports. [Corporations Act 2001, s292(2)]
If you would like to discuss the implementation of the new standard for your organisation, get in touch.