AASB 16 sting in the tail for AFSL Holders

By Martin Matthews

25 October 2019

If you hold an Australian Financial Services Licence (AFSL) and need to apply AASB 16: Leases, then you need to double check your net tangible assets! 

Most companies are well into their transition to AASB 16: Leases and have calculated their adjustments to increase assets and liabilities. But AFSL holders have a little extra to worry about. 

There are certain requirements that AFSL holders need to meet to prove to the Australian Securities and Investments Commission (ASIC) that their solvency is assured. This includes calculating the net tangible assets, which the regulations refer to as adjusted assets less adjusted liabilities. 

Adjusted assets will be the total assets according to normal accounting standards, less certain excluded assets including intangible assets. When you recognise your right-of-use asset under AASB 16 it could be interpreted as an intangible asset which is defined as: “a non-monetary asset without physical substance”.

But what about the liability? There is no ability to remove the liability from the “adjusted liabilities” as it is not an excluded liability. 

The example below shows the impact of AASB 16 adoption on your net tangible assets calculation.

 

Pre AASB 16

 

Post AASB 16

 

Total assets

100,000

 

140,000

 

Adjusted assets

 

100,000

 

100,000

Total liabilities

(70,000)

 

(110,000)

 

Adjusted liabilities

 

(70,000)

 

(110,000)

Net tangible assets/ (liabilities)

 

30,000

 

(10,000)

 

There is a risk that by adopting an accounting standard change, some businesses might end up having compliance issues in demonstrating their solvency. It’s just a book entry, there is no change to actual cash flows, so the logic doesn’t follow that AASB 16’s implementation should have this detrimental effect.

This issue hasn’t gone unnoticed. There has been word that ASIC is aware of the potential problem and is looking for a solution, which will likely be to exclude the lease liability or include the lease asset so as not impacting the ratio. Time is ticking and a solution is needed ASAP with many companies implementing AASB 16 from 1 July 2019 and the ongoing regulatory requirement for AFSL holders to continually meet solvency tests. This means some businesses may, in fact, be in breach right now (but we won’t know until reporting time). 

Keep an eye on the issue if you are an AFSL holder and be sure to keep in contact with your PKF representative to get regular updates as ASIC addresses the issue.