The ASC has issued FRS 116 Leases, effective for annual periods beginning on or after 1 January 2019.
Notably, FRS 116 reforms lessee accounting by introducing a single lessee accounting model. Specifically, lessees are required to recognise all leases on their balance sheets to reflect their rights to use leased assets and the associated obligations for lease payments, with limited exemptions.
FRS 116 essentially brings an end to lessees' off-balance sheet accounting for existing operating leases, unless exempted. In many cases, a key implication is an increase in reported assets and liabilities, accompanied by a front-loaded pattern of lease expense comprising depreciation and interest. Consequently, key financial metrics, such as gearing, liquidity and return on capital, will be affected. Lessees' compliance with financial covenants and/or regulatory requirements may also be affected.
These financial implications represent improved transparency about lessees' financial leverage and capital employed. Improved comparability will also result between entities that lease assets and entities that borrow to buy assets.
The full implications of FRS 116, including implications for lessors, will require in-depth analysis in the light of each entity's own facts and circumstances.
The ASC strongly encourages entities to commence impact assessment, implementation and stakeholders' communication in a timely manner. This includes taking actions necessary to prevent potential breaches of financial covenants and/or regulatory requirements arising from the application of FRS 116.