ASIC allows AFS licensees to include ROU assets in NTA and other calculations for financial requirements

In its recent Media Release MR 21-088, ASIC noted that it has amended the financial requirements of some types of AFS licensees so that they will be able to count right-of-use (ROU) leased assets towards determining ‘net asset value’ (NTA), ‘adjusted surplus liquid funds’ (ASLF) and ‘surplus liquid funds’ (SLF).

In our December 2020 Accounting News, we noted that ASIC was proposing these changes because many AFS licensees would otherwise fail to meet their financial conditions with the introduction of AASB 16 Leases. This is because lease liabilities reduce NTA with no corresponding increase in ROU assets (which ASIC considers to be intangible assets). NTA (or adjusted assets minus adjusted liabilities) then serves as a starting point for SLF and ASLF calculations.

Future pitfalls with NTA calculations

On transition to AASB 16, many entities used a modified transition approach that resulted in ROU assets being equal to lease liabilities, and therefore no impact on the NTA calculation. However, going forward, AFS licensees need to be aware that the NTA calculation could be negatively impacted over time with lower ROU asset balances compared to lease liabilities. This is because ROU asset balances are amortised on a straight-line basis over the useful life, compared to the principal amount of lease liabilities reducing at a slower rata using the effective interest method.

No neutral effect on SLF and ASLF calculations

Despite ASIC’s changes, ROU assets and lease liabilities can still causes headaches for licensees and result in SLF and ASLF financial requirements being breached.

The starting point for SLF and ASLF calculations is effectively NTA, which is then adjusted to exclude the effect of non-current asset and liability balances. If there are no lease payments due within 12 months, the whole ROU asset and lease liability are removed. However, for most leases, a portion of lease payments is due within 12 months and therefore classified as a current asset on the balance sheet. This current lease liability serves to reduce the overall SLF and ASLF calculations that may result in a breach of financial conditions for some licensees.

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