In Australia most businesses undertake some form of leasing activity whether it is renting an office and a number may finance vehicles and equipment on an operating lease basis.
To date a number of these lease arrangements have been classified as operating leases. As an operating lease they have not been recorded on the balance sheet of the business. Instead they have been recorded as an expense of the business.
In 2016 the International Accounting Standards Board issued IFRS 16 on Leases. The Australian Accounting Standards Board subsequently amended the definition of Leases to fall in line with International Accounting Standards.
In Australia for annual periods beginning on or after 1 January 2019 (i.e. 31 December 2019 or 30 June 2020 year ends) this change will require the majority of leases held by businesses to be recorded on the balance sheet.
What is the impact of this change?
This change will in most cases increase both assets and liabilities on the balance sheet and may impact bank covenants such as Debt/Equity ratios.
What to consider in the lead up to this change?
If you have leasing liabilities it is worthwhile having a chat with your Accountant to see what impact if any the coming changes may have on your financials and if applicable consider revising any bank covenants likely to be impacted.