AASB 16 Leases was applicable for the first time for the year ended June 2020, and adoption of the standard required the identification of leases and determining their lease terms, borrowing rates, lease payments and fixed increases in order to calculate the Right of Use (ROU) assets and ROU liabilities at year end.
As we begin to prepare for the 2021 year-end, there are a few things that require your consideration. There are a number of circumstances that give rise to a lease modification that will require a change to your original lease calculations.
Increases in rent/lease payments due to CPI increases or market reviews will require a recalculation of your ROU asset/liability.
COVID19 rent relief in the form of waived or deferred rent/lease payments will also require a re-evaluation of the treatment of your ROU asset/liability. AASB 16 Leases and the COVID-19 Implications – Practical Expedient will be looked at in our May Newsletter).
Changes to the overall lease term will require recalculation of your ROU asset/liability. This requires an annual reassessment of your lease renewal option periods. As you near the end of the current lease term it will become more or less certain whether you will choose to extend your lease. Once the choice to take up the option becomes almost certain, the ROU lease asset and ROU liability should be re-calculated.
Modifications to rental space
Has the ROU or Lease altered in terms of space? If you now have extra room, less room, a carpark, etc then the lease agreement has changed and will need to be altered to include or exclude the space.
Have you begun sub-letting during 2020-2021? It is important to recognise the separate lease components and separate out any subleased portion. Ensure you have a measurable separate component. De-recognise the component that is sub-leased from the ROU asset and recognise this as a receivable.
Borrowing / discount rates
If there have been any lease modifications that require the re-statement of a ROU asset, then you will also need to reassess the borrowing/discount rate used in the measurement of the ROU lease liability.
Common mistakes found by our Davidsons Audit Team in last year’s audits of AAS16 ROU asset and ROU lease liabilities included the use of incorrect borrowing rates, the incorrect accounting treatment of low value and short-term leases, and peppercorn leases.
Examples included the same fixed increase rate applied to all lease payments regardless of what was specified in each lease agreement, difficulty in substantiating the incremental rate of borrowing that was used, and inclusion of option terms that are not reasonably certain.
Low Value Leases are leased assets valued at AUD$10,000 or less and they qualify for the low value asset exemption.
Short Term Leases are leases that have a total lease term of less than 12 months and they are not required to be recorded under AASB 16. If the short-term lease has an option to extend the lease and it is reasonably certain that the lease option will be exercised then the lease cannot be considered a short term lease anymore and must be recognised under AASB 16.
Peppercorn leases were not required to be included under AASB16 for the year ended June 2020. However, if a Not-For Profit elected to early adopt AASB-16 for their peppercorn lease in June 2020 then they will need to recalculate and continue to disclose this in 2021.
If you would like to learn more about AASB 16 Leases keep an eye out for our newsletter articles to come regarding further updates on 30 June 2021 reporting. Alternatively, give us a call on 03 5221 6399 or email us at firstname.lastname@example.org and speak with one of our audit team members who will be able to guide you in the right direction.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.