New standard to bring transparency, says KPMG

New standard to bring transparency, says KPMG

A new accounting standard, published by the International Accounting Standards Board (IASB), will bring increased transparency and comparability to the balance sheet of Australian companies, claims KPMG.

The new standard, IFRS 16 Leases, requires companies to bring most leases onto the balance sheet, recognising new assets and liabilities. At present, many analysts adjust financial statements to reflect lease transactions that companies hold off-balance sheet.

According to Patricia Stebbens, audit partner at KPMG Australia, all companies that lease major assets for use in their business will see an increase in reported assets and liabilities.

“This will affect a wide variety of sectors, from airlines that lease aircraft to retailers that lease stores. The larger the lease portfolio, the greater the impact on key reporting metrics,” Ms Stebbens said.

“Current lease accounting requires financial statement users to adjust for off-balance-sheet leases. The key change will be the increase in transparency and comparability. For the first time, analysts will be able to see a company’s own assessment of its lease liabilities, calculated using a prescribed methodology that all companies reporting under IFRS will be required to follow.”

According to KPMG, the impacts are not limited to the balance sheet; there are also changes in accounting over the life of the lease. In particular, companies will now recognise a front-loaded pattern of expense for most leases, even when they pay constant annual rentals.The new requirements also introduce a stark dividing line between leases and service contracts – with the former brought on-balance sheet, while service contracts will remain off-balance sheet. 

Ms Stebbens warned companies to expect increased costs of compliance as they prepare to adhere to the new standard.

“The new requirements are less complex and less costly to apply than the IASB’s earlier proposals. However, there will still be a compliance cost. For some companies, a key challenge will be gathering the required data. For others, more judgemental issues will dominate – for example, identifying which transactions contain leases.”

The accounting changes do not affect cash flows directly. However, given their scale, KPMG expects companies will be keen to understand the size of the lease liabilities arising from transactions they enter into between now and 2019.

“No-one wants to see accounting drive business behaviours – the tail should not wag the dog," Ms Stebbens said.

"But if accounting consequences are in the mix when a company is considering a deal, then the mix will change. For example, this standard essentially kills sale-and-leaseback as an off-balance-sheet financing proposition.”

New standard to bring transparency, says KPMG
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