Written byThe Australian Accounting Standards Board (AASB) is the government agency that writes the accounting standards Australian companies follow when preparing financial statements, including the rules for leases and depreciation.
Also known as: AASB, Australian Accounting Standards Board, AASB standards, Australian accounting standards, AASB 16
Key points
- The AASB is a Commonwealth agency under the ASIC Act; it makes standards under the Corporations Act and aligns them with international (IFRS) standards.
- AASB 16 puts most leases on the balance sheet, so an operating lease no longer keeps equipment off the books for reporting companies.
- Accounting depreciation under the standards is separate from tax depreciation, so the same asset can carry two different written-down values.
- Small proprietary companies and sole traders rarely have to lodge reports under the standards, but lenders still read accounts prepared by reference to them.
What the AASB does
The AASB develops, issues and maintains Australia's accounting standards. It was established as an Australian Government agency under the Australian Securities and Investments Commission Act 2001, and its standards have legal force for entities that must report under the Corporations Act 2001, such as disclosing entities, public companies, large proprietary companies and registered managed investment schemes. Other laws pick up the standards for charities, government bodies and superannuation funds.
Since 2005 the standards have followed the international IFRS standards, with Australian additions where local law or the not-for-profit sector needs them. ASIC enforces compliance for corporate reporters, and an auditor's opinion states whether the accounts comply with the standards. The AASB does not set tax rules; those belong to the ATO and the tax acts, which is why tax and accounting figures for the same business often differ.
AASB standards that touch finance
AASB 16 Leases is the standard most borrowers meet. Since 2019 a lessee recognises a right-of-use asset and a lease liability for almost every lease longer than twelve months, with a carve-out for low-value items. The rent that used to sit in operating expenses becomes depreciation plus interest, which lifts reported earnings before interest, tax and depreciation and adds debt to the balance sheet. Loan covenants written on gearing or interest cover can move for that reason alone, and many facility agreements now specify which version of the standards applies.
AASB 116 governs property, plant and equipment and lets a business choose a depreciation method and useful life that reflect how the asset is actually consumed, independently of the ATO's effective life tables or the instant asset write-off. AASB 9 sets how lenders themselves account for loans and expected credit losses.
AASB and the small business borrower
Most small businesses never lodge financial statements with ASIC, and a sole trader or small proprietary company is not bound by the standards in the way a listed company is. In practice their accountants still prepare a profit and loss statement and balance sheet that borrow the standards' formats and terms, often as special purpose accounts, because that is what lenders and buyers expect to read.
When a lender assesses a business loan, the accounts are read with the standards in mind. Leases capitalised under AASB 16 are treated as debt, depreciation is added back to arrive at cash earnings, and any gap between tax accounts and accounting accounts is reconciled before serviceability is worked out. Knowing which set of figures the accountant has produced, and why, saves time in the application.
Example
A freight company in Gladstone runs its trailers on operating leases and has a bank facility with a gearing covenant. When AASB 16 first applied, its accountant brought every lease onto the balance sheet as a right-of-use asset and a matching liability. Reported earnings before interest, tax and depreciation rose, because rent became depreciation and interest, but total liabilities rose too and the gearing ratio moved toward the covenant limit without a dollar of new borrowing. The company and its bank agreed to test the covenant on the accounting rules in force when the facility was written, and the next facility letter spelled out that treatment from the start.
Not to be confused with
- ATO
- the ATO administers tax law, which sets its own depreciation and deduction rules, while the AASB sets the accounting standards behind financial statements
Frequently asked questions
Are AASB standards the same as IFRS?
Largely. Australia adopted the international IFRS standards in 2005 and the AASB issues them under its own numbering, with additional paragraphs and standards for not-for-profit and public sector entities. A set of accounts that complies with Australian standards for a for-profit company will normally also comply with IFRS.
Do small businesses have to follow AASB standards?
Only where a law requires financial reporting, and for most sole traders and small proprietary companies none does. Their accounts are still prepared with the standards as the reference point, because lenders, investors and buyers expect familiar figures. Large proprietary companies, public companies and charities have formal obligations.
What is AASB 16?
The leases standard. It requires a lessee to recognise a right-of-use asset and a lease liability for almost all leases, replacing the old split between finance leases on the balance sheet and operating leases off it. Short-term and low-value leases are exempt, and lessor accounting largely kept the old classification.
Is accounting depreciation the same as tax depreciation?
No. Accounting depreciation under AASB 116 reflects the pattern in which the business uses up the asset, using a method and life the business chooses. Tax depreciation follows the tax acts and ATO effective life rules, including accelerated measures such as the instant asset write-off. The two produce different written-down values for the same asset.
Who enforces accounting standards in Australia?
ASIC monitors and enforces compliance by companies that report under the Corporations Act, and auditors report on whether financial statements comply. The AASB writes the standards but does not police them. Charities answer to the ACNC and public sector bodies to their own auditors-general.
Related terms
Balance sheet
A balance sheet is a financial statement that shows a business's financial position at a specific date: what it owns (assets), what it owes (liabilities) and the owners' equity.
Read definitionProfit and loss statement (P&L)
A profit and loss statement (P&L) is the report that lists a business's revenue and expenses over a period and shows whether it made money or lost it.
Read definitionDepreciation
Depreciation is the fall in an asset's value over time, spread across the years the asset is used so the cost can be claimed as a tax deduction.
Read definitionOperating lease
An operating lease is a lease where you pay to use an asset for a set term and hand it back, with the financier keeping ownership and the resale risk.
Read definitionFinance lease
A finance lease is a lease where the financier owns the asset and your business pays to use it for most of its life, taking on the risks of ownership.
Read definitionOff-balance-sheet (OBS)
Off-balance-sheet (OBS) describes assets, liabilities or obligations a business is exposed to but does not record on its balance sheet, such as guarantees and some leases.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.