A lot of the focus on implementing the new leases standard has been around the recognition on the balance sheet and the change in the nature of the expenses recognised in the statement of profit or loss. While the amount of cash payment will not change, the classification of the amounts in the cash flow statement could change. Here we respond to the common question we are hearing on the classification of cash payments for lessees in the statement of cash flows, under AASB 16 Leases.
Let’s pose a scenario that a company has four lease arrangements:
Question: How are the various lease payments classified in the statement of cash flows?
Interpretive response: Following the adoption of AASB 16, there are flow on impacts to the classification of lease payments in the statement of cash flows. The underlying lessee accounting model has changed and this, together with the explicit requirements in the standard (see “In technical speak” below) mean that entities need to reconsider the classification of lease payments.
For the office space lease, the amount allocated - $995,000 - for the repayment of the principal portion is included in cash outflows of financing activities.
Consistent with the company’s existing policy of classifying interest paid in the cash flow statement, cash payment for the interest portion - $5,000 - of the office lease liability is presented either as operating or financing activities.
However, variable lease payments, amounts paid for low-value leases and short-term leases that are not capitalised as part of lease liability are included in cash outflows of operating activities. The company includes a total of $145,000 in cash outflows of operating activities.
In the statement of cash flows, a lessee shall classify:
(a) cash payments for the principal portion of the lease liability within financing activities
(b) cash payments for the interest portion of the lease liability applying the requirements in AASB 107 Statement of Cash Flows for interest paid; and
(c) short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability within operating activities [AASB 16: 50].
If you would like to discuss the implementation of the new standard for your organisation, please contact us.