The Australian Accounting Standards Board (AASB) has changed the accounting standard applicable to leases through ‘AASB 16 Leases’. Full details on these changes can be found in the AASB Leases Accounting Standard. Based on this change, the ABS have made amendments to the Economic Activity Survey to better capture leasing information, regardless of whether or not the business you are reporting for has adopted the new standard for lease accounting.
The AASB 16 standard for leases is referred to in some places below as ‘the Standard’, or ‘AASB 16’.
When does the AASB 16 change apply?
The change applies to annual reporting periods beginning on or after 1 January 2019. Therefore, it may not be applicable for the 2018-19 financial year of the business you are reporting for unless the new accounting standard was adopted early or implemented retrospectively. For not-for-profit entities, AASB 16 Leases is effective for annual reporting periods beginning on or after 1 January 2020, however it can be adopted earlier.
These implementation dates may be subject to change by the AASB.
HOW SHOULD THE ECONOMIC ACTIVITY SURVEY INCOME AND EXPENSES QUESTIONS BE ANSWERED?
Overall, you should provide answers that are consistent with how leasing expenses were treated and AASB 16 was applied within the business during the reporting period. For those businesses that have adopted the standard, some further information is contained below on how to complete the Economic Activity Survey in light of the amendments made and the adoption of the standard by the business.
What if the business I am reporting for has not adopted the standard?
If the business you are reporting for has not yet adopted the AASB 16 standard, the operating lease payments should be reported as Rent, leasing and hiring expenses.
Are there any changes to reporting of income?
AASB 16 Leases will not affect the reporting of income for businesses. Operating lease income received should be included in Rent, leasing and hiring income. As a lessor, for finance leases, the capital repayment is not reported on the Economic Activity Survey and the interest component is reported as Interest Income.
How has the reporting of expenses changed?
If the business has adopted the Standard, the business will still pay a single rental payment for an operating lease. However, the business will now account for the payment under different expense items: an interest component, a depreciation component and potentially an operating expense component as well.
How should I report my lease expenses?
The operating lease expenses that are subject to the Standard should be reported as follows:
- Interest component – include in Total interest expenses and Interest expenses in respect of operating leases;
- Depreciation component – include in Total depreciation and amortisation and Depreciation and amortisation in respect of operating leases;
- Operating expenses (for variable lease payments not included in the measurement of the lease liability, or service components previously embedded in the lease) – include in Rent, leasing and hiring expenses.
Where do I report outgoings related to my leases?
Any outgoings related to leases, such as a fire service levy or utilities charges, should be included in Rent, leasing and hiring expenses.
Is labour hire included in Rent, leasing and hiring expenses?
No, labour hire is include in other questions and reported as follows:
- Payments made to another (related or unrelated) business for the supply of staff on a fee or contract basis, where the staff entitlements are paid by the business supplying the employees, should be recorded in the Labour Costs question Payments to other businesses/organisations (e.g. employment agencies) for staff.
- Payment to another business for recruitment services (i.e. advertising vacancies, conducting interviews) on behalf of your business should also be included in Payments to other businesses/organisations (e.g. employment agencies) for staff.
- Any costs incurred by your business in the conduct of its own recruitment processes (e.g. payment directly to newspapers for running job vacancy advertisements) should be reported in Other operating expenses.
HOW SHOULD THE ECONOMIC ACTIVITY SURVEY CAPITAL EXPENDITURE QUESTIONS BE ANSWERED?
How should I report my right-of-use assets which were previously off-balance sheet?
Assets related to operating leases should not be reported as Capital expenditure for the lessee. This includes assets created by AASB 16 for preexisting operating leases, and assets recognised due to the commencement of new operating leases, remeasurement of an existing operating lease, or lease modifications. The value of the underlying asset is collected through the lessors' reporting.
Assets acquired through finance leases during the period should continue to be reported as Additions in the Capital expenditure and disposal of assets section against the appropriate asset.
How should I report leasehold improvements to my right-of-use assets?
Any leasehold improvements to a right-of-use asset should be reported by the lessee as Additions to Dwellings, other buildings and structures in the Capital expenditure and disposal of assets section of the survey.
OTHER QUESTIONS REGARDING HOW TO REPORT BASED ON AASB 16 CHANGES
How do I report intercompany leases?
Intercompany leases between ABN’s within the same business unit selected to receive the Economic Activity Survey should be eliminated in the consolidated accounts of the business unit and the reporting should reflect this.
Intercompany leases between ABN’s in different business units selected to receive the Economic Activity Survey should be reported in the appropriate survey questions.
How do I report embedded leases?
Embedded leases are leases embedded in other contracts which are not primarily for the purposes of leasing. The AASB 16 standard generally requires embedded leases to be separated from the non-lease component and the lease component is then reported as per the Standard.
How should I report a lease with less than twelve months left on the contract?
For any operating lease that has a lease term of less than twelve months, it is exempt from the Standard. Any lease payments in respect of these leases should be recorded in Rent, leasing and hiring expenses.
DISCLAIMER: The below should not be considered accounting advice, please see AASB 16 accounting standard for full details.
What has changed in the accounting standards?
The primary change in AASB 16 requires a lessee to recognise all leases within scope as ‘right-of-use’ assets and lease liabilities on their balance sheet, rather than expensing leasing payments though operating expenses in the income (profit and loss) statement. As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability in their income (profit and loss) statement instead. This is similar to other non-financial assets, such as property, plant and equipment, and financial liabilities.
What is a lessee?
A lessee is a business/organisation that obtains the right to use an underlying asset for a period of time in exchange for consideration.
What is a lessor?
An entity that provides the right to use an underlying asset for a period of time in exchange for consideration.
What is an underlying asset?
An asset that is the subject of a lease, for which the right to use that asset has been provided by a lessor to a lessee.
What is an operating lease?
An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
What is a finance lease?
A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
How are subleases treated?
Subleases are required to be accounted for in the same way as other leases and are subject to the AASB 16 standard.
Are any leases excluded from AASB 16 Leases?
Leases which are not in scope of AASB 16 Leases (the Standard) include:
- leases to explore or use minerals, oil, natural gas and similar non-regenerative resources;
- leases of biological assets within the scope of AASB 141 Agriculture held by a lessee;
- service concession agreements within the scope of Interpretation 12 Service Concession Arrangements;
- licences of intellectual property granted by a lessor within scope of AASB 15 Revenue from Contracts with Customers;
- rights held by a lessee under licensing arrangements within the scope of AASB 138 Intangible Assets for such items as motion picture film, video recordings, plays, manuscripts, patents and copyrights.
The business may elect not to apply the requirements of AASB 16 to:
- Short term leases: A lease that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option cannot be classified as a short-term lease.
For example, a business that leases machinery or equipment for 12 months or less can elect not to recognise a right-of-use asset for this lease. The expenses associated with the short term lease, where the exemption has been applied, should be reported as Rent, leasing and hiring expenses in the Economic Activity Survey.
- Low value leases: While the AASB does not specify a threshold for ‘low value leases’ the International Accounting Standards Board stated that the value they had in mind when developing this exemption was leases of assets with a value of $5,000 USD. This is based on the value of the asset when it is new, regardless of the age of the asset being leased.
For example, low value assets include tablets, personal computers, small items of office furniture, telephones and any similar assets. The expenses associated with low value leases, where the exemption has been applied, should be reported as Rent, leasing and hiring expenses in the Economic Activity Survey.