New standard - Lease accounting

What does the new standard mean for your business?

Fundamental changes to the accounting for leases will have significant business implications in virtually every industry. The headline change is that almost all operating leases will now go onto the lessee's balance sheet. However, the profile of expenses will also change and there are a range of commercial and practical changes to consider.

As the effective date of the new lease accounting standard draws near, many Australian companies are not yet ready to adopt the new leasing standard [see Is Corporate Australia ready for major accounting changes?]. PwC has developed a practical 10-step approach to assist companies in getting ready for the new requirements in time.


Background

In early 2016 a new international accounting standard for leases was released

The new standard is mandatory from 1 January 2019 but many companies will want to transition retrospectively and need to present comparatives for the year before.

Putting leases on balance sheet will increase the focus on lease accounting and the practical and commercial implications may be significant.

How will it affect your metrics?

The new accounting for leases will affect your financials and metrics. According to a recent PwC study, on transition to the new standard EBITDA will increase by 13% and debt will increase by 22% for the average listed company.* When key leases are renewed, it will increase debt overnight and interest expense in the following years.

Companies will need to carefully manage their lease renewals and forecast lease positions so they can minimise earnings volatility and communicate clearly with stakeholders.

*Source: PwC’s global lease capitalisation study

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Practical challenges

There are several practical challenges, including:

  • Collecting data for all your leases - a recent study found 39% of companies don’t centrally manage their lease agreements*
  • Validating the quality of data on an ongoing basis
  • Regular re-assessments - due to CPI increases or market rent reviews, for example
  • Combining knowledge from different parts of your business, such as deciding whether to include extension options
  • Increased scrutiny from key stakeholders including investors, banks, customers and suppliers.

For most companies, the significant changes to lease accounting mean that spreadsheet-based calculations will not be reliable or accurate enough. To help companies manage the transition to the new requirements, PwC has developed a practical 10-step approach that takes these challenges into account.

*Source: PwC/CBRE US Lease Accounting Survey

Contact us

Sean Rugers
Partner - Capital Markets and Accounting Advisory Services, PwC Australia
Tel: +61 2 8266 0309
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Gordon Thomson
Partner - Capital Markets and Accounting Advisory Services, PwC Australia
Tel: +61 3 8603 3574
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Katelyn Bonato
Director, PwC Australia
Tel: +61 3 8603 0868
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Masha Marchev
Senior Manager, PwC Australia
Tel: +61 3 8603 0581
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