AASB 16 Leases became mandatorily effective for annual reporting periods beginning on or after 1 January 2019 and brings significant change to lease accounting for lessees as most leases will now need to be recognised on a lessee’s balance sheet in the form of right-of-use assets with corresponding lease liabilities.
In this five-part series we break down AASB 16 Leases into digestible chunks, with each instalment focusing on a key aspect of the new standard – the definition of a lease, lease term, lease payments, discount rate and transition options.
Part 1: Definition of a lease
This is the first instalment of a series of publications aimed at breaking down the new leases standard. Part 1 is about assessing whether an arrangement is, or contains, a lease. It contains examples and diagrams for identifying leased assets.
Part 2: Lease term
Assessing the lease term will often require judgement, especially when the arrangement contains features such as extension and termination options. Part 2 provides 4 different scenarios for reassessing the lease term.
Part 3: Lease payments
Under AASB 16 Leases, lessees are required to recognise most leases on balance sheet as a right-of-use asset with a corresponding lease liability. The lease liability is measured at the present value of the lease payments, which begs the question: which lease payments should be included in determining the lease liability, both initially and subsequently? We take a look at some of the more complicated aspects of lease payments.
Part 4: Discount rate
Under the new leases standard, lessees are required to bring most leases onto the balance sheet in right-of-use assets with lease liabilities. These assets and liabilities are measured at present value of the future lease payments. But at what discount rate? We explore the two different rates in detail.
Part 5: Transition options
For many entities, adopting AASB 16 Leases will be a challenging task: one that will require entities to think about systems and processes, data collection, communication with stakeholders, and the impact on key financial metrics, debt covenants and remuneration schemes. A smooth transition requires an understanding of the many transition options and practical expedients that the new standard has to offer. This instalment of our leases series focuses on the transitional reliefs that are available to make the first-time adoption of the new standard simpler.