Does your business lease premises, motor vehicles or equipment?

Changes to the accounting for leases will apply to entities that prepare financial statements in accordance with Australian Accounting Standards.

You will you need to consider how the new accounting standard AASB 16 Leases will affect your financial reporting at 30 June 2019, and how this may impact on your business going forward.

Whilst non-reporting entities, being the majority of our small to medium business clients, are not required to complete comprehensive financial statements in accordance with all accounting standards, these changes may still have an impact where stakeholders such as banks put in place conditions regarding application of these standards.

Given these changes can have a wide spread impact on all types or reporting entities, it is important that your entity dedicates enough resources to successfully implement these standards, including factoring in enough time to consult with your audit team and other relevant stakeholders.

For the 2018-19 financial report, your notes to the financial statements must detail your assessment of the impact of new accounting standards not yet effective. Given the significant changes resulting  from these new standards, our expectation is your entity will be required to provide quantified estimates of the expected impacts of these new standards.

AASB 16 Leases will see virtually all assets, with exceptions for smaller assets and those on 12-month rental agreements, to be recognised on your balance sheet by recording a Right-Of-Use (RoU) asset and a lease liability.

The initial entry on transition (being 1 July 2019) is to record both the RoU asset and the liability at the same value, being the present value of unpaid cash flows associated with the lease, discounted at an appropriate discount rate.

The RoU assets are amortised over the period of the lease agreement which was used to calculate the initial amounts recognised as both assets and liabilities. The lease liability is increased with effective interest and reduced as lease payments are made, until reduced to zero.

These changes may also impact your key financial ratios such as gearing, current ratios and earnings before tax.

Your benchmarks or KPI’s will need to be adjusted to take this into account, especially if these are set by external parties such as banks in relation to borrowings, or regulators in relation to licencing or funding.

Please contact our Audit team on 5221 6399 or so that we can discuss the potential impact on your business.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.