Changes to the Australian Accounting Standard Affecting Franchisees & Franchisors: Bringing Leases Onto Your Balance Sheet

Andrew Grima

Unless you yourself are an accountant, or you are particularly interested in staying on top of changes within the profession, accounting standards probably aren't the most exciting topic to mull over.  With this said, if you are either a franchisor with a significant leasing portfolio, or a franchisee with a similarly large leasing footprint, it is a good idea to have a discussion with your accountant regarding the introduction of the Australian Accounting Standard AASB 16, which is set to affect those with property leases from 1 January 2019.

The joys of AASB 16

I didn't find a lot of personal enjoyment in studying accounting as part of my Economics Degree, hence my decision to eventually become a lawyer.  Of course, whilst the many weeks of studying the Accounting Standards brought me no immediate joy, they are incredibly important for Australian accountants and, of course, businesses to stay up to date on.

As of 1 January 2019, the Australian Accounting Standards Board (AASB) will introduce a new leasing standard (AASB 16) requiring Australian businesses to bring operating leases onto their balance sheets.  

This means that certain leases that had previously been recognised off a business' balance sheet will now have to be accounted for, in what is known as a right of use asset and lease liability.  The idea is to ensure that there is greater transparency (and thus, more accurate representation) with regard to an organisation's financial commitments, including the lease liabilities.  

For some of our readers, this is set to become a significant liability, although realistically speaking, the change is likely to affect almost all Australian businesses to some extent.  Unfortunately, considering the issues and complexities which are likely to arise following the implementation of the AASB 16, the 2019 changes are set to increase the potential risks associated with commercial and financial reporting.

What does AASB 16 mean for you?

Firstly, the best thing to do at this stage is to simply speak with your accountant regarding the new standards, as they will have the best insight into how heavily your business will be affected, as well as the professional know-how to effectively prepare for the changes.  You may need to take a detailed look at your accounting systems in order to ensure that you are able to capture and record more data.

It's important to note that the changes may well result in your balance sheet looking a lot less healthy than it previously did.  You may also need to consider how this will impact on the covenants and financial KPI's set by your bank, as well as any other financiers with whom you are involved.

Business owners should consider taking a close look at the way in which rental payment structures are negotiated.  It is similarly important for you to speak to your accountant about this, as you will likely have questions once you have read through the new standard - for example, do you know whether turnover rent falls within the new requirements?

The above should not be seen as definitive accounting advice, and I stress the importance of talking to your accountants about the incoming changes to the Australian Accounting Standards.  

Once you have spoken with your accountants regarding the introduction of AASB 16, you are ready to negotiate the terms of your lease, and if you would like to speak with someone in our Commercial Property team, please don't hesitate to get in contact with: