An industry expert has spoken out about a proposed change to the way businesses account for leased property and equipment, fearing it could cost businesses millions each year in compliance and education.
The proposed change to Australian Accounting Standards, which could be finalised as early as the end of 2014, would require businesses to record on their balance sheet any leased property or equipment, such as office space or photocopiers.
Leo Tutt, Head of the Audit Focus Group for national accounting and advisory firm William Buck, said businesses big and small would be forced to potentially recognise millions of dollars worth of liabilities on their balance sheets.
“The biggest impact of these proposed changes is that bringing leases for the rental of assets on to balance sheets could significantly increase the liabilities of the business without a corresponding increase in tangible assets,” he said.
“This, together with any deferred tax balance consequences, could make the business look more debt laden than the books currently show, with the risk that the changed debt ratios could breach borrowing covenants with financiers depending on how the financier views the corresponding intangible right of use asset.”
“These finance contracts may need to be renegotiated, requiring significant time, cost, effort and the potential risk that the funding relationship could breakdown.”
Leo said an increase in the company’s assets also had the potential to increase its reporting obligations to the corporate regulator ASIC if its company status was upgraded for compliance purposes.
“If a business is upgraded to a large proprietary company it would mean an increased level of compliance with reporting obligations under the Corporations Act he said.
“Putting in place monitoring and record keeping controls, as well as the costs to educate staff and financial statement users on the new accounting standard requirements, is going to be a significant burden for smaller businesses.”
“The impact will be felt most severely at the smaller end of town as it’s these businesses that aren’t as adequately resourced to manage a transition of this scale.”
The International Accountings Standards Board (IASB) has been discussing the issue for over five years; in order to provide increased transparency for investors about a company’s assets and debts. The lengthy theoretical discussions are about to become a stark reality for business.