Under AASB 16, how does the treatment of operating leases differ from that of finance leases on a lessee's balance sheet?
Question
Under AASB 16, how does the treatment of operating leases differ from that of finance leases on a lessee's balance sheet?
Solution
Under the Australian Accounting Standards Board (AASB) 16, the treatment of operating leases and finance leases has significantly changed for lessees. Here's a step-by-step explanation:
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Prior to AASB 16: Previously, operating leases were not included on a lessee's balance sheet. They were considered off-balance sheet financing. The lease payments were simply recognized as an expense on the income statement over the lease term. Finance leases, on the other hand, were capitalized on the balance sheet, recognizing both a 'right-of-use' asset and a corresponding lease liability.
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Introduction of AASB 16: AASB 16, which came into effect on January 1, 2019, eliminated the classification of leases as either operating leases or finance leases for lessees.
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Post AASB 16: Under AASB 16, all leases (with some exceptions) are treated in a similar way to finance leases under the old standard. This means that lessees are required to recognize a 'right-of-use'
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