ASIC announces ‘no action’ on right-of-use lease assets

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Ram Subramanian, CPA Australia Policy Adviser | September 2020

This article was current at the time of publication.

Australian Financial Service (AFS) licensees are likely to be breathing a sigh of relief regarding the Australian Security and Investments Commission’s (ASIC) recent temporary “no action” announcement.

ASIC will take a temporary “no action” regulatory position, in relation to potential breaches of the financial resource test that could arise from the accounting treatment for leases.

Under the new accounting standard AASB 16 Leases, lessees with a 30 June 2020 financial year-end must now recognise a new right-of-use (ROU) asset and a lease liability in their financial statements for most leases.

As part of its “no action” notification, ASIC states that: “while the lease liabilities are taken into account for the purposes of an AFS licensee’s financial resource requirements, the right-of-use assets are now generally treated as intangible assets and do not count towards meeting those requirements”.

This would have meant that the increase in liabilities arising from reporting under the new leasing standard would be taken into account in determining licensees’ financial resource requirements, but not the corresponding ROU asset.

In announcing the recent concession, ASIC clarified that it will not take regulatory action against licensees who use the ROU asset to count towards their financial resource requirements.

Also, it will not take regulatory action against licensees over past breaches arising from this matter.

Although ASIC announced this concession as a temporary one, it is likely that it will give further consideration to the matter. This may include a public consultation on a long-term position.

The Australian Stock Exchange has also been contemplating this issue for its own listing rules requirements around net tangible assets. It is yet to make its position public.

ASIC’s position regarding the treatment of ROU assets for financial resource requirements is not new. Back in December, the regulator announced financial reporting focus areas for 31 December 2019 year-ends, stating that for AFS licensees, “a net tangible assets requirement would include lease liabilities, but intangible assets such as a lease right-of-use assets would not be counted in meeting that requirement”.

Internationally, the Basel Committee on Banking Supervision, the global authority in banking supervision, issued a “frequently asked question” in 2017 stating that “for regulatory capital purposes, an ROU asset should not be deducted from regulatory capital so long as the underlying asset being leased is a tangible asset”.

The FAQ clarifies that “the intent of the revisions to the lease accounting standards was to more appropriately reflect the economics of leasing transactions, including both the lessee’s obligation to make future lease payments, as well as a ROU asset reflecting the lessee’s control over the leased item’s economic benefits during the lease term”.

AASB 16 states that the ROU asset should be presented as part of the same line item on the balance sheet within which the corresponding underlying asset would have been presented if it were owned.

This would mean that if the lease relates to premises, the related ROU asset would be presented as part of the property, plant and equipment line item. However, the standard does not directly deal with the classification of the ROU asset as either tangible or intangible.

A common view expressed is that the classification of the ROU asset should follow the nature of the underlying asset.

Accordingly, under AASB 16 the ROU asset for a leased vehicle or leased premises would be classified as tangible. However, if the asset was a leased taxi licence, it would be classified as an intangible asset.

ASIC consideration around the financial resource test for AFS licence holders is not in itself an accounting matter. However, applying the underlying accounting treatment where the ROU asset is classified in the same category as the underlying asset appears a sensible approach.