Are you ready for the new AASB 16 accounting standard? KPMG specialists share their tips for success. The new leases accounting standard AASB 16 Leases, known as AASB 16, came into effect from 1 July 2019 and impacts most entities in the public and private sector. Despite its far reaching effects, many are still unprepared to meet the new regulation.
AASB 16 fundamentally changes an entity’s financial reporting requirements to require lessees to bring most operating leases onto the balance sheet for the first time. That means, for each lease, an organisation needs to measure and recognise a lease liability and corresponding right-of-use asset.
What does this mean for the public sector?
Lease accounting is no longer a ‘set and forget’ exercise. AASB 16 introduces new measurement requirements that require collection of a significant amount of data such as:
- lease data from the lease contract; and
- estimates from management about the intended use of the leased asset, both at lease commencement and throughout the life of the lease.
Entities will also need to reassess these key data points and assumptions on an ongoing basis, and reflect any changes in the lease balances each time they report – which is potentially monthly in the case of management reporting.
Why the change?
This accounting change came about at a global level, starting with the introduction of the International Financial Reporting Standard (IFRS 16 Leases) issued by the International Accounting Standards Board (IASB) which has now been adopted into an Australian accounting standard, AASB 16.
Marina Shu, Associate Director, CFO Advisory at KPMG says it was driven by a need to introduce more transparency and consistency in how entities report on their commitments and assets used as part of their operations.
“In the past, the absence of information about leases on the balance sheet meant that analysts and stakeholders were not able to properly compare entities that buy assets with those that prefer to lease, without making adjustments or assumptions.”
Previously, leases for assets like cars, equipment and buildings could be recorded off-balance sheet. Andrew King, Partner, CFO Advisory at KPMG says the new standard improves financial reporting.
“At the start of a lease, an entity obtains the right to use an asset for a period of time and have a contractual obligation to pay for that right. So it makes sense for them to recognise an asset and liability on the balance sheet.”
“AASB 16 should provide increased transparency and comparability, and a more complete picture of an entity’s leasing activities through improved disclosures too,” says King.
Public sector “more challenged”
The new standard brings particular challenges for the public sector, which manages high volumes of leases that now need to be accounted for on the balance sheet.
King says the public sector is challenged more than the corporate sector, as it has additional accounting changes to deal with such as the new Service Concessions standard which the private sector does not.
“As governments seek to maintain fiscal discipline for the longer term, there is an increased focus on public sector balance sheets, meaning accurate and timely leasing numbers are essential, ” says King.
If you aren’t compliant with the new standard, you’re not alone. King says KPMG is continuing to work with a range of clients at varying levels of preparedness.
“Some haven’t focused on it and the complexity has caught them by surprise, whilst others are trying to use spreadsheets, implementing a third party lease accounting system, or even outsourcing to a managed service because of AASB 16’s complexity,” he says.
“We are seeing organisations with approximately 50 or more complex leases needing to turn to technology, like a sophisticated model or lease accounting system, to support the volume of lease re-measurement required under the new standard.”
“It is resource intensive and public sector organisations are trying to make do with existing headcount but rapidly some are finding they need help,” advises King. “You need a level of technology for this one. If I were a CFO I would be considering what the tech solutions are because you can’t expect finance to handle it alone.”
Tips for successfully managing change
To ease the stress on BAU activities, some organisations are redeploying people from other teams, bringing in advisors and turning to technology and managed services to help with the heavy lifting.
Shu says the secret to successfully implementing accounting technology is having the right people in the room.
“People who have had the most successful implementations have advisors close by,” she says. “An area of continued focus and sometimes frustration for our clients seems to be the status of their system implementations or how those systems are functioning.
Entities continue to speak of challenges in that area even many months after they have adopted and successfully transitioned to AASB 16, and while technology has certainly been a challenge for the adoption of this standard, it appears interpretation is definitely a contributing factor. It is becoming increasingly important to make sure you have the right processes, controls, and support in place,” says King.
For King, navigating this change comes down to sharing knowledge and collaborating between peers.
“Share stories and seek guidance – your peer network is critical for learning lessons from each other, learning what systems are working and which aren’t,” he says.
And for those entities that are still getting up to speed with the new standards, King has one piece of advice. “Time is running out as we head to the first year end audits for this – so make sure your plan and solution are right and robust.”
To find out more information on the new leases standard AASB 16, visit the KPMG website.