LEASING AGREEMENTS: THE NEW ACCOUNTING GUIDELINES YOU NEED TO KNOW ABOUT
Michael Calagis, 26 August 2016
At SER we pride ourselves on providing support to our vendor partners and customers in order to enable smart business decisions. With this in mind, we have outlined the new accounting guidelines for leasing agreements. SER advises customers to seek advice on their individual circumstances from their accountant.
Alex Malley, Chief Executive of CPA Australia, last week provided a good insight into this topic on www.theaccountant-online.com
In simple terms: an agreement is deemed to be a lease if the contract conveys the right to use an identified asset for a period of time in exchange for consideration.
This topic is complex, and we’ve identified 10 points to assist with your understanding of the changes:
- The new Lease classification guidelines have been provided by the International Accounting Standards Board (IASB).
- The classifications will commence at the first accounting period on or after 1st January 2019. (note: this will likely mean 1st July 2019 for many small and mid-sized customers).
- Agreements already in place prior to commencement of the changes will not require re-classification by Customers (lessees).
- From 2019, leases will be shown on the Balance Sheet as a Leased Asset and a Lease Liability.
- Lease Asset values will be depreciated / amortised in accordance with their useful life, much in the same way that the Balance Sheet currently treats assets that our purchased outright.
- Lease Liability values will include the present value of all remaining lease payments, plus any residual value, plus any ‘reasonably certain’ extension payments.
- Reporting of Lease Liabilities will generally exclude payments that are linked to usage, for example ‘overs’ charges relating to excess prints above agreed minimums.
- The P&L will show that accounting period’s expenses for (1) the interest portion of the Lease Liability and (2) depreciation of the Leased Asset.
- ‘Short-Term Leases’ of less than 12 months duration may be treated as exempt from the new guidelines.
- ‘Low-Value Asset Leases’ may also be treated as exempt from the new guidelines. A new asset threshold of US$5,000 has been recommended by IASB. (note: from 2019, whether businesses decide to maintain ‘old classification’ leases alongside ‘new classification’ leases may come down to accounting and compliance costs)
Wow!! And that is just our plain English summary.
These changes will be of particular interest to our Vendor Partners and Customers. Especially those that are transacting business on the basis of Managed Services, Cloud Solutions and Software financing. Therefore, we will continue to monitor how these guidelines will be put into practice. On the back of a strong pillar of formal accounting advice, SER can assist sensible business decisions for all of our Partners and Customers.
The new guidelines are also likely to create considerable differences in the Financial Reports of lessees. For example, SER has just moved into fantastic new premises. From 2019, we will have to show rent as a Balance Sheet liability – every remaining dollar we are due to pay the landlord until the end of the lease. With that said, I’d better get back to work – that’s a lot of debt to pay off!
National Credit Manager, S.E. Rentals
S.E. Rentals are the finance as a service specialists that will help you grow your business by providing finance solutions in an 'all things technology' future. We provide you with the flexibility, scalability and agility to help you achieve your Managed Service objectives, and our unique in-house software platform automates the process for you with a One Bill Solution - your bill - your document - your branding.