The new leases accounting standard AASB 16 Leases, known as AASB 16, came into effect from 1 July 2019 and impacts most entities in the public and private sector. Despite its far reaching effects, many are still unprepared to meet the new regulation.
AASB 16 fundamentally changes an entity’s financial reporting requirements and will require lessees to bring most operating leases onto the balance sheet for the first time. That means for each lease, an organisation needs to measure and recognise a lease liability and corresponding right-of-use asset.
Lease accounting is no longer a ‘set and forget’ exercise. AASB 16 introduces new measurement requirements that require collection of a significant amount of data, such as lease data from the lease contract and estimates from management about the intended use of the leased asset, both at lease commencement and throughout the life of the lease.
Entities will also need to reassess these key data points and assumptions on an ongoing basis, and reflect any changes in the lease balances each time they report – which is potentially monthly in the case of management reporting.
This accounting change initially came about at a global level starting with the introduction of the International Financial Reporting Standard (IFRS 16 Leases) issued by the International Accounting Standards Board (IASB) which has now been adopted into an Australian accounting standard, AASB 16.
The introduction of the new standard was driven by a need for greater transparency and consistency in how entities report on their commitments and assets used as part of their operations. In the past, the absence of information about leases on the balance sheet meant that analysts and stakeholders were not able to properly compare entities that buy assets with those that prefer to lease, without making adjustments or assumptions.
The new standard also improves financial reporting, as leases for assets like cars, equipment and buildings could previously be recorded off-balance sheet. These leases should be recognised as an asset and liability on the balance sheet, since, at the start of a lease, an entity obtains the right to use an asset for a period of time, and has a contractual obligation to pay for that right. AASB 16 will provide increased transparency and comparability, and a more complete picture of an entity’s leasing activities through improved disclosures.
The new standard brings particular challenges for the public sector, which manages high volumes of leases that now need to be accounted for on the balance sheet. The public sector also has additional accounting changes to deal with such as the new ‘Service Concessions’ standard. As governments seek to maintain fiscal discipline for the longer term, there is an increased focus on public sector balance sheets, meaning accurate and timely leasing numbers are essential.
To ease the stress on BAU activities, some organisations are redeploying people from other teams, bringing in advisors and turning to technology and managed services to help with the heavy lifting.
Both technology and interpretation can contribute to challenges in successfully implementing AASB 16, therefore organisations must ensure they have the right processes, controls, and support in place to successfully navigate this change.
Sharing knowledge, seeking guidance and collaboration will also assist in the creation of a robust solution that meets the requirements of the new standards.
Learn more about how KPMG’s Lease Hub can assist in reducing the disruption to your business and manage your AASB 16 lease accounting from start to finish.
The original version of this article appeared on The Mandarin website on 20 January 2020.