ASIC to take ‘no action’ against AFS licensees that fail to meet financial resource requirements because of right-of-use assets recognised under IFRS 16 Leases
In December 2019 Accounting News, we noted ASIC’s position, outlined in Media Release MR19-341, regarding the impact of right-of-use (ROU) assets recognised under IFRS 16 Leases on the financial resource requirements of Australian Financial Services (AFS) licensees.
Specifically, ASIC noted that lease liabilities would be included in the ‘net tangible asset’ calculation, but intangible assets, such as the related ROU assets, would not be counted. This could result in some AFS licensees breaching their financial condition requirements.
ASIC ‘no action’ position for breaches of financial resource requirements
ASIC recognises that some AFS licensees may face difficulty in complying with their financial resource requirements. This is because of the assumption noted above where ROU assets are generally classified as intangible assets, and therefore do not count towards meeting the financial reporting resource requirements for AFS licensees.
On 7 July 2020, ASIC therefore issued a temporary no-action position to deal with such potential breaches of the financial resource requirements that apply to AFS licensees because ASIC considers ROU assets to be intangible assets. The no-action position to allow right-of-use lease assets to count in satisfying AFS licensee requirements will apply until further notice.
How does the ‘no action position’ work?
ASIC will firstly allow AFS licensees to count ROU assets towards their financial resource requirements.
ASIC will also not take regulatory action against AFS licensees in relation to past breaches of financial resource requirements, if those breaches arose because ROU assets were not counted towards meeting the financial resource requirements.
Refer to ASIC’s Media Release 20-158 for more information regarding the ‘no action’ position.