Number of changes and challenges.

Companies will be required to bring the majority of operating leases on-balance sheet with the implementation of the new leases standard AASB 16 (IFRS 16), effective 1 January, 2019. The new standards will significantly affect reporting of revenue, values of financial instruments, loan loss provisions, and the impact of lease arrangements.

Global professional services firm, KPMG, which specialises in audit and assurance, tax and advisory, has outlined one of the most significant changes to financial reporting since International Financial Reporting Standards (IFRS) adoption in 2005.

“Property and equipment leases previously recognised off-balance sheet will be accounted for as a right-of-use (ROU) asset and lease liability which will bring more transparency about a company’s lease commitments and change key financial metrics such as gearing ratios, asset turnover and EBITDA, according toLessor accounting will be largely unchanged from the current leases standard, AASB 117 (IAS 17),” a KPMG statement says.

“Implementation of the new leases standard is expected to pose financial and operational challenges beyond financial reporting. Not only will systems, processes and controls have to be modified to ensure complete and accurate capture of leasing data and judgments, but companies will have to assess and manage the impacts to, for example, debt covenants, credit ratings, leasing strategy, impairment testing and tax-effected accounting. Companies should not underestimate the effort, time and cost required to implement these changes.

“If organisations underestimate the total implementation effort, funding requests for 2017 and 2018 activities may not cover the cost of implementation. In order to meet the requirements of AASB 16 by 2019, organisations should develop a robust project plan and allow for the cost of implementation in 2017 and 2018 budgets,” it continues.

ASIC Commissioner John Price said, “We remind directors and management of the importance of planning for the new standards and informing investors and other financial report users of the impact on reported results.

“Given the extent of the changes to financial reporting, it is important to determine the extent of any impact now and to put in place implementation plans for these new standards. Public disclosure on the impact of the standards and timely implementation is important for investors and to retain market confidence.”