ASIC changes the treatment of lease assets in the financial requirements for Australian Financial Services (AFS) licensees.
Many AFS licensees (AFSL) have to maintain either Net Tangible Asset (NTA), Surplus Liquid Funds (SLF), or Adjusted Surplus Liquid Funds (ASLF) financial ratios which, if breached, could result in them losing their AFS licence. These financial requirements are specified in each AFS licence.
Upon adoption of AASB 16 Leases for financial years ending 30 June 2020, AFSL lessees were required to recognise a lease liability and right of use asset whereas previously operating leases were not recognised on their balance sheet. ASIC viewed right of use assets as intangible assets meaning that these lessees now had to include their lease liabilities but exclude their right of use assets when calculating their NTA, SLF or ASLF. This caused some AFS licensees considerable concern and resulted in some being required to hold additional capital, not because of any fundamental change in their business or cash flows, but as the result of an accounting standard change.
In July 2020 ASIC issued a temporary no-action position for AFS licensees in relation to potential breaches of the financial requirements that arise from changes to the accounting treatment of lease assets while it considered the issue.
ASIC has now issued legislative instruments to change the financial requirements and licensing conditions of some types of AFS licensees in relation to the treatment of right-of-use assets.
These changes will allow those AFS licensees to include right-of-use assets in the calculation of their net tangible assets and, where the right-of-use asset is a current asset, surplus liquid funds and adjusted surplus liquid funds. The changes are effective from 28 April 2021. As a result, ASIC’s no-action position no longer applies.
Details of the changes can be found on ASIC’s website here.
If you have any questions, or would like any information on what these changes mean for you, please contact your Nexia Advisor.
Article by Martin Olde