AASB 16 has changed the reporting landscape for organisations entering into a leasing arrangement. As the first reporting periods after the implementation of AASB 16 approaches, some businesses are waking up to the fact that the transition to AASB 16 is no easy feat, and could have long-lasting ramifications on the business.
So what are the problems organisational finance teams should be aware of, and what is the solution?
Ongoing problems with good AASB 16 governance
In our experience working with clients on AASB 16 compliance, we’ve had a number of recurring questions centred around two key problems:
- Transition strategies
- AASB 16 maintenance
Choosing the right transition strategy
To make complying with AASB 16 easier on busy finance teams, the AASB set out a series of ‘transition methods’ in their guidelines. One of these methods - ‘retrospective method #1’ - seems much quicker than its counterparts, but it may not be right for every organisation. And that’s where we encounter problems.
There is no one-size-fits-all transition method, and the quickest path could have serious ramifications on future profitability if it isn’t right for your business. It’s important that you examine all of the transition methods and determine whether the future cost is worth the short-term convenience, or whether more planning now could save you over time.
- Example: For one client, the full retrospective method would have removed all of their accumulated retained earnings, which had a negative impact on their ability to declare dividends. We advised they select another method, which kept their retained earnings intact. While this would create some other problems with future profitability, the business now has time to consider, manage and plan for it.
AASB 16 is not ‘set and forget’
Once you pick an appropriate transition method and get to the initial date of application, AASB 16 does not end there. You must keep your lease information current throughout the year.
These changes can be generally grouped into two categories:
- Reassessments: For instance, market reviews, CPI adjustments, changing the initial assessment of the lease term.
- Modifications: Actual changes to the legal agreement - for example, increasing or decreasing in scope. Additional factors such as whether you get a discount off market rate for, say, leasing an additional floor, must also be factored and accounted for.
To make matters more complicated, these two categories each have three additional subcategories. However, it is vital that any change in a lease arrangement is treated with these categories no matter how complicated, as they lead to different accounting outcomes.
Important note: This means that organisations must not only be able to transition to AASB 16, but their system must be efficient enough to be update leases and make quick changes. This may require a technology investment, as simple Excel sheets will likely prove too difficult to use.
A solution for those facing complexity
The experts here at BDO Australia are well-placed to help your organisation with AASB 16 on both a technological and advisory front.
- BDO Lead: This is our cloud-based lease management solution available to Australian businesses that require help managing the complexities around the new leasing standards. It has a simple user-friendly data input interface designed to make migrating to AASB 16 easier, able to store thousands of leases at a time - and running all the necessary calculations in the background. Users can quickly analyse all their documents based on certain criteria, track changes and reassess leases.
- Advisory and outsourced services: In addition, our team comprises some of Australia’s leading experts on AASB 16 and IFRS 16, and thanks to our connection to the global BDO network, we are also able to quickly tap into a raft of international expertise to advise on a range of governance questions. If you desire, we can manage AASB 16 compliance on your behalf, migrating your information to BDO Lead, liaising with your team to keep lease arrangements updated, and provide monthly journals to keep you apprised of all relevant business information. This takes the hassle away from you and your team, allowing you to do what you do best while we handle the complexities.
To learn more about how BDO Australia can help your organisation in particular, contact us today.