Revolutionary change on the way to ‘Accounting 101’

A change to the Australian Accounting Standards is on the way, and once finalised will likely see all of a business’ leases accounted for on balance sheet.

The standards that are currently in place do not require a business to list all of their lease liabilities, though this is set to change as early as late this year.

Kimberly Carney, National Technical Senior Manager at accounting and advisory firm William Buck, told Dynamic Business that the change will effectively revolutionize the way leases are accounted for on balance sheets.

“It’s a revolutionary, ground breaking change to the way in which leases have been accounted for, and small business in particular are not prepared for the changes. They often don’t have the processes, the record keeping, the client training, and they haven’t necessarily got the users of their financial reports educated on how this new accounting standard is going to impact the way in which people view their business,” Carney said.

The chief concern for business is that the change will result in more upfront expenses. Leo Tutt, Head of the Audit Focus Group at William Buck, said businesses big and small would be forced to potentially recognise millions of dollars’ worth of liabilities on their balance sheets.

“The biggest impact of these proposed changes is that bringing leases for the rental of assets on to balance sheets could significantly increase the liabilities of the business without a corresponding increase in tangible assets,” Tutt said.

“This, together with any deferred tax balance consequences, could make the business look more debt laden than the books currently show,” he added. “Putting in place monitoring and record keeping controls, as well as the costs to educate staff and financial statement users on the new accounting standard requirements, is going to be a significant burden for smaller businesses.”

Yet Nikole Gyles, Director of Technical Projects and Board Activities at the Australian Accounting Standards Board pointed out that not all small businesses use the Australian Accounting Standards, and therefore the change will not be relevant to the full spectrum of SMEs.

Gyles added that changing the standard is a challenging project to implement, and has generated controversy.

“Most companies have leases and everyone has an opinion on how leases should be accounted for, and bringing leases on balance sheet is quite a shift in how entities have traditionally accounted for leases,” Gyles said.

The key reason for the change is principally to align Australian standards with what is being done internationally.

Kerry Hicks, Head of Reporting Policy at the Institute of Chartered Accountants, said the change was spearheaded in the US, where, following the GFC, there was a push to ensure all of a businesses’ expenses were clearly and transparently accounted for.

“The reason for this change is not to necessarily advantage business, but to advantage users of the business information and to enhance transparency,” Hicks said.

Currently there is yet to be clear picture of what the changes will actually look like, and there are two different proposals under consideration.

“The common thing in both proposals has been bringing all leases on balance sheet. The thing that was different [in the two proposals] is the impact on profit and loss. The first would have a big impact on profit and loss, while the second proposal had a more limited impact on profit and loss,” Hicks said.

Gyles indicated that while the finalised proposal is edging closer to being released, the Board cannot yet pinpoint an exact implementation timeframe.

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