Are you ready for the new AASB 16 accounting standard? KPMG specialists share their tips for success. The new accounting standard AASB 16 Leases, known as AASB 16, came into effect on July 1, 2019 and impacts most entities in the public and private sectors. Despite its far-reaching effects, many are still unprepared to comply with the new regulations.
The AASB 16 fundamentally changes an entity’s financial reporting requirements to require lessees to recognize most operating leases on the balance sheet for the first time. This means that for each lease, an organization must measure and record a lease liability and a corresponding right of use.
What does this mean for the public sector?
Lease accounting is no longer a “define and forget” exercise. The AASB 16 introduces new assessment requirements that require the collection of a significant amount of data such as:
- rental data of the rental agreement; and
- management’s estimates of the intended use of the leased asset, both at the start of the lease and throughout the term of the lease.
Entities will also need to reassess these data points and key assumptions on an ongoing basis, and reflect any changes in lease balances each time they report – which is potentially monthly in the case of MD&A.
Why the change?
This accounting change has taken place globally, starting with the introduction of the International Financial Reporting Standard (IFRS 16 Leases) published 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, said this was driven by the need to introduce more transparency and consistency in how entities report on their commitments and the assets used in their operations. .
“In the past, the lack 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 hypotheses. “
Previously, leases of assets such as 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 has a contractual obligation to pay for that right. So it makes sense for them to recognize an asset and a liability on the balance sheet. “
“The AASB 16 is expected to provide increased transparency and comparability, as well as a more complete picture of an entity’s leasing activities through improved information as well,” King said.
The “more challenged” public sector
The new standard presents particular challenges for the public sector, which manages large volumes of leases which must now be recognized on the balance sheet.
King says the public sector is more contested than the corporate sector because it faces additional accounting changes, such as the new standard on service concessions, that the private sector does not have.
“As governments seek to maintain fiscal discipline over the long term, the focus is increasingly on public sector balance sheets, which means accurate and timely rental figures are essential,” King said.
If you’re not up to the new standard, you’re not alone. King says KPMG continues to work with a range of clients at different levels of readiness.
“Some didn’t focus on that and the complexity took them by surprise, while others try to use spreadsheets, implement a third-party rental accounting system, or even outsource to a managed service due to the complexity of AASB 16, ”he said.
“We are finding that organizations with roughly 50 or more complex leases must turn to technology, such as a sophisticated model or lease accounting system, to support the volume of lease revaluations required under the new standard. “
“It takes a lot of resources and public sector organizations try to cope with the existing workforce, but quickly some need help,” King advises. “You need a level of tech for this one. If I were CFO I would consider what the tech solutions are because you can’t expect finance to take care of it on its own.
Tips for successful change management
To alleviate the stress on BAU operations, some organizations are redeploying people from other teams, bringing in advisors, and turning to technology and managed services to help do the heavy lifting.
Shu says the secret to successfully implementing accounting technology is having the right people in the room.
“The people who have had the most successful implementations have advisors nearby,” she says. “One area of continued interest and at times of frustration for our customers seems to be the state of their systems implementation or how those systems operate.
Entities continue to talk about challenges in this area even several months after adopting and successfully transitioning to AASB 16, and while technology has certainly been a challenge for adoption of this standard, it appears that interpretation is certainly a contributing factor. It is becoming more and more important to make sure you have the right processes, controls and support in place, ”says King.
For King, navigating this change comes down to knowledge sharing and peer collaboration.
“Share stories and seek advice – your network of peers is essential for learning from each other, knowing which systems are working and which are not,” he says.
And for those entities that are always learning about the new standards, King has a tip. “Time is running out as we head into the end of year one audits for this – so make sure your plan and solution is correct and robust. “
To learn more about the new AASB 16 lease standard, visit KPMG website.