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Businesses with operating leases are set to be substantially impacted by the new AASB 16 Leases standard, as one firm finds businesses “seriously underestimating” the implications of the accounting standard.
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New accounting standard ‘seriously underestimated’
08 August 2018
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The new accounting standard AASB 16 Leases comes into effect 1 January 2019 and is one of the “triple threat” of major accounting standards being rolled out, including AASB 19 Financial Instruments and AASB 15 Revenue from Contracts with Customers.
AASB 16 Leases will see virtually all assets, with exceptions for smaller assets and those on 12-month leases, to be recognised on a balance sheet.
Pilot Chartered Accountants partner Chris King said the new accounting standard would cover businesses that rent premises and lease equipment or motor vehicles, impacting their financial statements, including their ability to borrow funds.
“These changes will seriously impact key financial metrics such as gearing ratios, current ratios and EBITDA,” said Mr King.
“As an example anyone dealing with contracts that have earnouts based upon an EBITDA multiple or employee bonuses based on EBITDA achievement, could potentially pay a lot more than they anticipated based upon the new standard.
“Current ratios, which for many organisations are close to 1:1, may drop below this benchmark threshold, potentially leading others to question their financial viability,” he added.
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“The benchmarks you use will need to be adjusted to account for the changes, particularly if they have been set covenants by external parties like banks, financiers and regulators.”
Further, Mr King said the changes had the potential to turn a small company into a large company under the Corporations Act 2001.
“This would trigger auditing and reporting obligations for companies that previously had no ASIC obligations,” he said.
“Businesses should be talking to their advisors now to understand the impact the new standard will have on your business to reduce any potential issues and minimise implementation and compliance risk.”
Despite the ramifications, around six out of 10 Australian businesses have yet to reach out to accounting professionals to better understand the implications on their business.
PwC’s report on the new accounting standards earlier this year also found that less than one in 10 of Australia’s largest companies had completed their impact assessment for each of the three standards.
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