As of this year, the impacts of the new lease accounting standard (NZ IFRS 16) pertaining to leases will begin to appear in the financial statements for many NZ businesses. Consequentially, many businesses will need to fundamentally alter their processes for offering material leases, whether for commercial or residential property, vehicles, and heavy machinery.
The BDO Accounting Advisory Services team has stepped up to answer the questions of NZ businesses facing this change. The accounting-mechanics of the new change are relatively simple, however some of the judgements and estimates are not so, according to James Lindsay , Head of Accounting Advisory Services at BDO.
NZ IFRS 16 will now require most leases of lessees to be accounted for on an entity’s balance sheet, with some exceptions. In years prior, most leases (unless they were structures as “Finance leases”) have instead had their lease payments recognised as operating expenses, with nothing recorded in the balance sheet.
Even though this change was anecdotally met with resistance from many quarters, the objective of NZ IFRS 16 is to have entities present the economic substance of their businesses obligations (liabilities) and rights to use resources (assets) that lease agreements provide, in a much clearer and transparent way to the users of financial statements. At this stage, businesses impacted by this change include only include only for-profit entities that have a legal or other requirement to prepare financial statements in accordance with NZ IFRS (i.e. NZ GAAP).
The impacts of NZ IFRS 16 will make many businesses appear (on paper) more debt heavy and asset rich, with fewer operating expenses offset to varying degrees with higher interest and amortisation expenses.
While overall cash flow will remain unchanged, where the cash flows are present in a business’ cash flow statement will – with lease payments moving out of operating cash flows and into financing cash flows and wherever a business has elected to present interest payments
BDO recommends businesses begin the process of adopting NZ IFRS 16 as soon as possible, as putting this off has the potential to wreak havoc with a business’ upcoming year-end financial reporting process, as well as being able to identify potential breaches of bank covenants ahead of year-end so they can be addressed and rectified.
The next step for businesses with concerns over the impending adoption of NZ IFRS 16 is to partner with a professional accounting expert. As the accounting field becomes more specialised as a result of new accounting standards like NZ IFRS 16, it’s important to find partners who have real experience in implanting newer systems. As technology keeps changing how we and our businesses interface with information, specialist accountants are expected to be a business adviser and financial specialist rolled into one. BDO’s Accounting Advisory Service team can meet this challenge.
For more information and resources on NZ IFRS 16, visit BDO’s website at www.bod.nz/nz-ifrs-16