IFRS 16 / AASB 16 was introduced to provide greater clarity to the readers of a company’s financial statements of their lease obligations and leased assets.
Applies to all contracts deemed a lease which is defined as: If the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.
Under IFRS 16 / AASB 16, when a company leases an asset (the lessee), it must recognise a lease liability and right of use asset on the balance sheet.
The lease liability is the present value (PV) of the minimum value of lease payments similar to that of a finance lease under the previous lease accounting standard AASB 117. The right of use asset represents the right to use the leased asset. This balance is depreciated to zero.
These calculations are complicated and susceptible to manual error.
Under IFRS 16 / AASB 16, this accounting is now applicable to all leases. Under the previous lease accounting standard, accounting for an operating lease, the most common type, was very straightforward.
Accounting for modification of a lease is tricky and will require an intimate knowledge of IFRS 16 / AASB 16. Modifications often occur, for example, a change in the lease payment amount.
PV calculations are time-consuming, especially with a portfolio of 30+ leases. The accountant will need to: - Maintain two excel spreadsheets for the lease liability and right of use asset – for each lease. - Journals to reflect the changes in the month-to-month balances of the lease liability and right of use asset. - The split between and principal and interest payments. - Not miss any key dates, as they impact the lease accounting. - Rigorous lease disclosures in a set of financial statements.
How to comply? - Manually in Microsoft excel: > Cheapest > Most time consuming > Requires intimate knowledge of the standard > Suites lease portfolio of fewer than five leases > Susceptible to manual error
- Software solution: > Far more cost-effective when a large lease portfolio, e.g., 30+ lease > Automates all the calculations, journal entries and disclosures required by IFRS 16 / AASB 16 > Most accurate > Time-efficient > Audit efficiencies > Document management included