AASB 16 Leases is now effective, since it applies for periods beginning on or after 1 January 2019.
Our previous article explained how lease accounting changes under the new standard. However, one of the most difficult aspects of AASB 16 is initial adoption, because of the many different transition options and practical expedients available.
Confused about the accounting entries required to record on the transition to AASB 16 Leases?
RSM’s technical accounting consulting team explains the main transition options available.
Treatment of comparatives
Full Retrospective Approach
This approach requires applying the requirements of AASB 108 in full, which means that comparative amounts are restated as though AASB 16 had always applied, and the impact of the adoption of AASB 16 on each line item in the financial statements. Three balance sheets are required on transition, under AASB 101.
If AASB 133 Earnings per share applies to the entity, the impact of the adjustment for the current and comparative period on basic and diluted earnings per share is shown.
This approach ensures comparability of results and is a lower charge to the income statement in periods subsequent to the adoption of the standard.
However, it requires the determination of historic incremental borrowing rates and is likely to be more costly to implement.
Modified Retrospective Approach
The standard also permits an approach where comparative amounts are not restated, and instead, an adjustment is made to retained earnings, which represents the difference between the balance sheet under the previous standard and the balance sheet under the new standard.
The effect of this method must be disclosed. In particular, the weighted average lessee’s incremental borrowing rate applied to lease liabilities recognised in the statement of financial position at the date of initial application; and an explanation of any difference between:
- Operating lease commitments disclosed applying AASB 117 at the end of the annual reporting period immediately preceding the date of initial application, discounted using the incremental borrowing rate at the date of initial application, and
- The value of the lease liabilities recognised in the statement of financial position at the date of the initial application.
If you have any questions regarding the transition to AASB 16 Leases, please contact your local RSM office today.