AASB 16 brings significant change to lease accounting. This six-part guide will show you how to prepare including examples and diagrams for reference. It also focuses on some of the key aspects of the standard.
AASB 16 Leases became mandatorily effective for annual reporting periods beginning on or after 1 January 2019 and brought significant change to lease accounting for lessees as most leases now need to be recognised on a lessee’s balance sheet in the form of right-of-use assets with corresponding lease liabilities.
Part 1: Definition of a Lease
AASB 16 Leases became mandatorily effective for annual reporting periods beginning on or after 1 January 2019 and replaced AASB 117 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, as well as two lease-related interpretations. Part one addresses assessing whether an arrangement is, or contains, a lease.
Part 2: Lease Term
The lease term is a key input in calculating the amount of the lease liability (and consequently the right-of-use asset). Assessing the lease term will often require judgement, especially when the arrangement contains features like rent renewal and termination options.
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? Several examples are provided for guidance.
Part 4: Discount Rate
Under the new leases standard, lessees are required to bring most leases onto the balance sheet in the form of right-of-use assets with corresponding lease liabilities. These assets and liabilities are initially measured at the present value of the future lease payments. But at what discount rate?
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.
Part 6: Reassessments and Modifications
Lease modifications have always been common, however accounting for these changes is more involved under the requirements of the new leases standard. Thankfully, clear guidance on accounting for modifications has been included in AASB 16, so while lease modifications come in many different forms, an understanding of just a few key principles will address the accounting for all of them.