The New Leases Standard

The new leasing standard was released back in February 2016. At the time everyone said it is 'so far off in the future' that 'we don't need to worry about it'. Now that it is upon us, that view of 'it doesn't matter' still seems all to common. 

Unfortunately ... as they say ... ignorance is no excuse.

In its simplest sense, this new standard will remove most operating leases, and they will instead be treated like finance leases. Start thinking of the office space that you rent, the motor vehicles that you lease, that photocopier that you pay a monthly fee for (on a 4 year contract), etc.



You will start seeing on organisation's balance sheets a new class of asset called a 'right to use' asset. This reflects the value of that item that is being leased. There will also be lease payments due as a new liability. And to add even more complexity, where there used to be a single operating expense called 'rent', you will now have depreciation of the right to use asset and interest expense from the lease liability ... confused yet?

This is a standard that you can not ignore, and will need to understand. It will have a significant impact on every set of financial statements; new assets and liabilities could change organisation's ratios. The different categories of expenses will occur in different years to previously (more of the expenses sooner) and will appear further down the page (altering your EBITDA). And all of these changes just because of a new accounting standard! This is especially significant if senior staff have remuneration or bonus structure that is tied to the EBITDA figure (for instance).

How about peppercorn leases you ask? In combination with AASB1058 Income for Not-For-Profits (another new standard) you will now have to recognise the difference between market value and what you are paying as income to the organisation.

So where can you read more?