New standard to shake up government leases

The introduction of new leasing accounting standards in January is set to have big implications for government.

The new AASB 16 leasing standard, which requires all leases over a one-year period to be brought onto the balance sheet, is putting pressure on governments to improve the documentation of leasing obligations.

While previously many leasing arrangements were recorded over the life of a lease through an income statement, leases of more than 12 months and not classified as low-value assets will need to be noted on government’s statement of financial position.

Simon Fonteyn

The impact of the new standards could extend beyond broader reporting obligations to debt covenants, remuneration structures and procurement procedures, says Simon Fonteyn, managing director at Lease Info, a leasing systems provider.

“The implications are massive for government. Every lease over one year for every government department needs to be come under this standard, which requires the finance departments to recognise a right of use asset and liability for all operating leases,” he told Government News.

The changes will transform the way government departments and agencies manage finances, Mr Fonteyn says.

Leases with a nominal or “peppercorn” rent – a small sum paid in consideration of a lease, often paid for schools on crown land and local council clubs – will now need to be assessed at a market value.

This means that liabilities for these types of leases will be bigger on the books, Mr Fonteyn says.

“The issue for government is a lot of school halls, social infrastructure may be leased at a peppercorn rent and the new standard requires that to be assessed at a market rental.”

Some departments and agencies may even need to change remuneration structures to account for the increased liabilities, according to Mr Fonteyn.

“If companies are rewarding key teams on financial metrics, for example, those financial metrics will need to be readjusted as a result of this change.”

Procurement procedures may also be impacted as liabilities will increase substantially under the new standards, potentially leaving some agencies unable to secure funding at the same rate – forcing them to potentially move to finance leases.

Despite the scale of these new obligations, many governments are ill-prepared, Mr Fonteyn says.

Lease management platform

As governments prepare for AASB16, an Australian-first semi-automated lease management system has launched to help compliance with these new standards.

Developed by CSIRO’s Data 61 and Lease Info, the Accurait platform uses machine learning to subtract key data from leases, such as clauses and important dates.

The data can be linked to financial and other systems for audit purposes, Mr Fonteyn said.

“It also allows you to manage a portfolio for a lease by indexing key clauses to make sure all obligations are understood from a financial and regulatory point of view,” he said.

The platform can save up to 30 minutes per lease and thousands of dollars over the life of the lease, whilst improving compliance by ensuring legal obligations are documented online and integrated into databases, accounting systems and other management tools, he says.

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