On 1 January 2019, the date of initial application of AASB 16, a company applies AASB 16 using a modified retrospective approach. It recognises lease liabilities of $2.5 million and right-of-use-assets of $2.1 million, with the difference recognised in retained earnings at that date. The company disclosed operating lease commitments of $2.8 million in its 31 December 2018 financial statements.

The company applies the short-term lease exemption to all classes of assets. The company considers that the impact of adopting AASB 16 is material.

The company applied the following practical expedients on transition:

• Grandfathered its assessment of whether an arrangement was a lease under the previous standard
• “Short-term” lease exemption – for all contracts that expire within 12 months of the date of initial application, lease payments are expensed in the profit or loss i.e. leases are not on balance sheet; and
• Used hindsight when determining the lease term where a contract contains an option to extend or terminate the lease.

Question 1: Are there any specific disclosures the company must make in its half-year report for the six months ending 30 June 2019?

Interpretive response: There are no new lease disclosures included in AASB 134 Interim Financial Reporting. However, in the half-year report, consistent with AASB 134, the company should explain:

• AASB 16 had been adopted, with a date of initial application of 1 January 2019 as this is a significant event that had occurred since the end of the last annual reporting period
• The nature of the change in accounting policies for leases. For example, how leases were accounted for previously and under the new accounting policy. It could note under the new accounting policy that lease liabilities and right-of-use assets are recognised for leases where the company is a lessee, except for short-term leases for all classes of assets, where the lease payments are expensed in the period incurred*
• The effect of the change in accounting policies. For example, that the modified retrospective approach of transitioning was applied and the impact was the recognition of lease liabilities of $2.5 million and right-of-use-assets of $2.1 million with the difference of $0.4 million recognised in opening retained earnings.

Companies should also consider including the specific transition disclosures that are required in annual financial statements by AASB 16, and those required by paragraph 28 of AASB 108. This assessment will be a matter of judgement. For example, the company may disclose that it has grandfathered its assessment of whether an arrangement was a lease under the previous standards.

Question 2: What are the specific transition disclosures in the annual financial statements in the year of adoption?

Interpretive response: In addition to the quantitative impacts and changes in accounting policies – additional specific transition disclosures are required. For example, in the first annual financial statements the company will need to disclose it has adopted the following practical expedients**:

• Grandfathering its assessment of whether an arrangement was a lease under the previous standards
• “Short-term” lease exemption; and
• The use of hindsight when determining the lease term.

As the company elects to apply the modified retrospective method to transition, it must also disclose:

• The weighted-average incremental borrowing (discount) rate used at the date of initial application (transition date). If the company has leases in different currencies, it may wish to consider disclosing separate rates for each of the currencies; and
  
• An explanation of the difference between the present value of operating lease commitments of $2.8 million disclosed in its 31 December 2018 annual financial statements, discounted using the discount rate at transition date; and the lease liabilities of $2.5 million recognised at that date.
  

Additional annual disclosures required by AASB 16 are discussed in other AASB 16 Check articles.

* There are some scenarios where leases may not be recognised on-balance sheet:

• If the lease payments are variable, for example based on usage [AASB 16: 26-28]
• Leases which are eligible for the short-term or low value elections [AASB 16: 5-6].

Otherwise, previous operating leases will be recognised on-balance sheet on transition to AASB 16.

** If a lessee uses one or more of the specified practical expedients in paragraph C10, it shall disclose that fact. [AASB 16: C13]

If you would like to discuss the implementation of the new standard for your organisation, please contact us.