According to Chris King, a partner in the corporate advisory team at Brisbane-based Pilot Chartered Accountants, the new standard is due to come into effect on 1 January 2019, and is likely to catch many business leaders off-guard.
He said that the change, which is aimed at improving transparency around lease commitments, will require operating leases to be listed on a company’s balance sheet, rather than as the rental or lease payment expense.
Operating leases will cover both those for renting premises as well as leasing vehicles and equipment.
“These changes will seriously impact key financial metrics such as gearing ratios, current ratios and EBITDA,” Mr King said.
“As an example, anyone dealing with contracts that have earnouts based upon an EBITDA multiple or employee bonuses based on EBITDA achievement, could potentially pay a lot more than they anticipated based upon the new standard.
“Current ratios, which for many organisations are close to 1:1, may drop below this benchmark threshold, potentially leading others to question their financial viability.”
Mr King added that benchmarks will need to be changed to incorporate these changes, “particularly if they have been set covenants by external parties like banks, financiers and regulators”.
“The term of the lease will have a significant impact on the value of the lease asset and lease liability,” he said.
Other contracts and agreements that could be impacted under the new accounting standard include contractual arrangements linked to financial performance (i.e. employee bonus schemes), banking covenants and existing licensing arrangements.