AASB 16 LEASES
AASB 16 replaces AASB 117 ‘Leases’ and for lessees will eliminate the classifications of operating leases and finance leases. Subject to exceptions, a ‘right-of-use’ asset will be capitalised in the statement of financial position, measured as the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and small office furniture) where an accounting policy choice exists whereby either a ‘right-of-use’ asset is recognised or lease payments are expensed to profit or loss as incurred.
‘Low-value assets’ have not been quantified in the standard, however, the Basis for Conclusions accompanying the standard indicates that assets with a value, when new, of US$5,000 or less would be considered ‘low-value’.
After initial recognition, the lessee shall measure the right-of-use asset using either a cost model or the revaluation model of AASB 116 if those right-of-use assets relate to a class of property, plant and equipment to which the lessee applies that revaluation model. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs.
Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). In the earlier periods of the lease, the expenses associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. However, EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) results will be improved as the operating expense is replaced by interest expense and depreciation in profit or loss under AASB 16. For classification within the statement of cash flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) component.
For lessor accounting, the standard does not substantially change how a lessor accounts for leases. In particular: the distinction between finance and operating leases is retained; the definition of each type of lease, and the supporting indicators of finance lease are substantially the same as AASB 117; and the basic accounting mechanics are also similar, but with some different or more explicit guidance in a few areas. These include variable payments; sub-leases; lease modifications; the treatment of initial direct costs; and lessor disclosures.
The new standard requires different and more extensive disclosures, both quantitative and qualitative, about leasing activities when compared to AASB 117, with the objective to provide information that enables users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
The transitional rules allow either a fully retrospective application of the standard or a partial retrospective approach on transition. Under the partial retrospective approach, the accumulative effect of initially applying the standard is recognised as an adjustment to equity at the date of initial application. There are a number of more specific transition requirements and optional reliefs available.
The new standard is likely to impact most entities and particularly those that have substantial leases currently classified as operating leases. The new definition of a lease may also result in some arrangements previously classified as finance leases ceasing to be recognised as such (e.g. laptops that are individually low-value assets acquired in a single lease). Entities should consider modelling the impact of adoption of the standard using both a full retrospective approach and the various transitional options in the partial retrospective approach as the consequences of each approach could have a material impact on future profitability of the entity as a result of those leases in existence at the transition date.