A big change to accounting standards is coming soon!
Jason Croston, Managing Director, SRJ Walker Wayland 07 3490 9988, Jason.croston@srjww.com.au
There haven’t been many significant changes to accounting standards for quite some time. AASB 16 (Leases) is a new standard that is expected to have a significant impact on the preparation of financial statements and the amount of calculations and disclosures that will need to be prepared.
It is effective for reporting periods beginning on, or after, 1 January 2019 (i.e. 30 June 2020); however, the standard requires retrospective application so it needs to be considered soon.
The practical steps that club boards and management should consider now are:
1. Carefully consider whether your financial reporting framework is best suited to your circumstances:
a. The options are General Purpose, General Purpose (Reduced Disclosure Regime) and Special Purpose Financial Reports.
b. Both of the General Purpose options require full compliance with Australian Accounting Standards including the new leasing standard.
c. Special Purpose means that clubs can choose which Australian Accounting Standards to apply, provided the accounting policies are appropriately disclosed and the financial statements presented are true and fair.
d. The club’s board and management, in collaboration with their auditor, should decide which of these three reporting frameworks is the most appropriate framework for their circumstances.
e. The reporting framework application rules are generally based on judgement as to whether there are existing users that rely upon General Purpose Financial Reports to make economic decisions in relation to the club.
2. Consider the accounting policy that will apply to the club within the applicable financial reporting framework.
3. Calculate the impact of the introduction of the new accounting standards and make the necessary adjustments to the club’s accounting records to reflect any changes to the accounting treatment. If your club determines that Special Purpose financial reporting is acceptable, it may be appropriate to continue with the club’s existing accounting policy for leases.
In summary, the changes that will come from fully adopting the new AASB 16 will result in no change for the lessor, but for the lessee, generally all leases with a few exceptions, whether operating or finance leases, will now be accounted for on the balance sheet of the club. Previously only finance leases were accounted for on the balance sheet of the club.
A typical example of this is the lease of a club’s premises. Clubs generally are mixed between owning their land and buildings and renting from a third party.
In some cases, the third party is related (for example, a RSL Club renting from a RSL Sub Branch) or from a government department where the rent is not necessarily reflective of the current market value of the property.
Under the new standard, not only will these leases be brought to account on the balance sheet rather than treated as an expense through the Profit and Loss Statement as occurred previously, there will also need to be adjustments to ensure that the market value of the property is being reflected.
Clubs will need to recognise the difference between the carrying amounts of the right-to-use asset and lease liability as income in the Profit and Loss Statement (AASB 1058 paragraph 10).
Example: Peppercorn leases – First time adoption of AASB 1058 Club A was built on land leased to it by a government department.
The government department (the lessor) leases the land to Club A (the lessee) for a payment of $10 per year for 99 years (i.e. a peppercorn lease).
The following information is relevant:
On 1 July 2018:
- The present value of the remaining lease payments is $110, and
- The fair value of the right of use of the land is $2.1 million.
On 1 July 2019:
- The present value of the remaining lease payments is $100, and
- The fair value of the right of use of the land is $2 million.
Club A has a 30 June year end and prior to applying AASB 1058, had not previously recognised a right-of-use asset for land or a lease liability.
Club A can choose to bring to account the adjustments (to asset, liability and opening accumulated surplus) on either 1 July 2018 or 1 July 2019. The asset is amortised over the 99 years of the lease.
For further information on how these changes to the accounting standards will affect your club, please contact SRJ Walker Wayland.
