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- A new accounting Standard has potentially significant implications for Australian entities that lease office, retail and industrial property. Entities with large numbers of leases, such as retailers, banks or some government agencies, are likely to be most impacted by the change.
- The new Standard, AASB 16 Leases, was approved in February 2016 and comes into effect in less than three years, after 1 January 2019. The Standard is likely to materially change the way leases are administered and accounted for.
- The change will require most leases (real estate as well as other operating leases such as equipment and vehicle) to be capitalised and presented on balance sheet as a right-of-use asset and lease liability. This is a significant change from the current rule which allows many leases to be used as a form of off balance sheet financing.
- The change is expected to be felt throughout companies from the ‘C suite’ to the operational level with implications for real estate strategy, lease administration, credit ratings, financial metrics, debt management, capital requirements and executive remuneration.
- The new Standard is likely to result in a significant administrative burden and require possible changes to real estate policy, loan covenants and remuneration packages. However, AASB 16 Leases should not result in major changes to the wider real estate leasing market as the majority of leasing decisions are not driven purely by accounting objectives