Impact of AASB 16 on BHP and Rio Tinto's Financial Statements

This report analyzes the impact of AASB 16 on BHP and Rio Tinto's financial statements, reasons behind changing of the leasing standards by AASB, and the implications of AASB 16 on the auditing and assurance firm.

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ADVANCED ACCOUNTING REPORT
by [ Your Name]
Course
Professor’s Name
Institution
Location of Institution
Date

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Advanced Accounting Report
Leasing is becoming an important solution of financing a fact which has seen a wide use.
This is because it enables a company to make use of the property and equipment without having
to incur substantially large cash outflows to access them. The flexibility and the benefits of a
lease in terms of providing a cover for obsolesce give the lessee the chance of evading residual
value risks. Since leasing is the only way of obtaining the physical use of an asset without having
to purchase it, it has become the widely used financing method among big corporations in
Australia.
From contemporary definition, a lease is a contract where one party who is the leaser,
conveys his or her own property in form of either land or services to be used by another party
called the lease for a specified period of time stipulated in the lease agreement in return for a
specific payment amount (Deegan et al., 2012, np; Chapple, 2016, pp. 365). However, the
changed definition of a lease would mean that for a contract to be regarded as a lease, the lease
agreement should enable the leases to control the use of the leased asset for a specified period of
time and at the same time obtaining substantial economic benefits from it. The move by
Australian Accounting Standards Board to release the new lease standards (AASB 16) in
February 2016 is intended to bring a general overhaul in Lease Accounting.
Beginning the financial period 1st January 2019, many Australian entities will have to
abide as per the new regulations outlined by the Australian Accounting Standards Board. The
new regulations purposes to scrap the classification of the operating lease and bring all the leases
together with their liabilities to the company’s balance sheet. This paper seeks to determine the
reasons why the leasing standard has been changed, investigate the effect of AASB 16 on BHP
Billiton and Rio Tinted Limited’s financial statements, evaluate whether the overhaul in the

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leasing standards would be more useful to the financial statement users of Rio Tinto and PHB
and identify the regulations that can have implications for the auditing and assurance firm
(KPMG) as a result of providing consultancy services to a client on the effect of AASB 16 on
entities financial statements.
Just like any other companies in Australia, the implementation of the AASB 16 is
expected to pose a number of operational and financial challenges to the financial statements of
BHP Billiton Limited and Rio Tinto Limited. These organisations have a big number of large
lease assets, many service contracts embedded with leases which hold complex and long-term
leases (Bdo.com.au, 2018, np.). As of now, many companies have not fully progressed in the
process of implementing AASB 16's standards despite much efforts that are intended to bring a
change in the accounting for leases.
Reasons Behind Changing of the Leasing Standards by AASB
In order to harmonize the Australian Accounting standards with those of the International
Financial Reporting Standards, the Australian Accounting Standards Board sought to change the
lease standard AASB 16 to conform with IFRS 16. The change seeks to remove the concept of
the operating and the finance lease for leases and replace them with a single lease accounting
model. Unlike before where leased property and equipment were recognized off the balance
sheet, the new standards require that leases should be accounted as a right for-use (ROU) where
the leased assets together with the associated lease liabilities will be reflected in the balance
sheet (Michelle Gibbs, 2018, np.). The changes are also intended to bring more transparency in
the organization regarding the commitments to leases and at the same time changing the financial
statement metrics such as returns on capital employed and earnings before interest and taxes. The
main reason behind the changing of the leasing standards by AASB was, therefore, to bring

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significant changes to the financial reporting practice as a result of the adoption of International
Financial Reporting Standards (IFRS).
Effects of AASB 16 on the Financial Statements of BHP and Rio Tinto
Despite the fact that the impact of the AASB leases standards has not yet been felt by a
number of entities in Australia, there is an extensive coverage of the effects of the changes that
would be brought by the functioning of the standard. The new leases AASB 16 standard has a
number of effects and implications on both the income statement and the balance sheets of BHP
Billiton and Rio Tinto. First of all, it means that the implementation will have to change many
aspects of lease accounting even beyond the financial reporting context (Martin, 2017, np.). The
processes, controls and systems of recognition and recording of leases will have to be modified
so as to ensure the lease records are complete and accurate. Both companies will have to assess
the impacts of the leasing strategy by managing the related accounting items such as debt
covenants, impairment testing and tax-affected accounting items ("AASB 16: Leases", 2018,
np.). The changes posed by AASB 16, therefore, requires a lot of time and effort from the side of
the companies in order to implement them.
The Main Implications of AASB 16 Standard to the Lessees
The new standard means that there will be no more operating leases as per IFRS 16
unless in certain exceptions where the lessee decides not to apply the requirements of IFRS 26
because the lease contract is made of items of short-term leases or the property is of very low
value. The lease payments for assets of low values will, however, be recognized on a straight-
line basis over the specified lease term. The new AASB 16 also requires that all the leases
(unless an exception) should be capitalized in the balance sheet by recognizing a right of use of

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the asset together with lease liability for the present value of the obligation (KPMG, 2018, np.).
This means that, there will be no more rental expenses (prepared on a straight line basis) when it
comes to operating lease costs because all the leases will be incurring an upfront-end loaded
expense which compromises the method of depreciation on the right of use of the asset and
hence the interest on the liability of the lease.
During the initial determination of the of the right of use of the asset and the lease
liabilities to be paid, the AASB 16 standard requires that the non-cancellable costs such as
inflation-linked expenses, payment for option periods at which the company is certain to make
use of the property will have to be included in arriving at the present value figure of the lease.
This further means that the lessees of retail premises who were required to pay turnover of
contingent rental costs and those who were required to make contingent rental payments will be
relieved of capitalizing the right of use of the asset but will expense the cost in the profit and loss
statement as it used to be the case (Aasb.gov.au, 2018, np.) The overall requirements of AASB
16 in regard to the rights–to-use the assets and the lease liabilities is to recognize them in the
balance sheet unlike before where it was regarded as an operating lease. The effect of this
distortion of the balance sheet change is that the asset base is going to be significantly increased
while the debt figure is also going to increase.
Effect on the EBITDA
Since the standard will remove rent as operating expense but as a depreciation expense,
the EBITDA of the lessees will be affected tremendously. For instance, instead of recording the
rent expense, the lessees will have to recognize the depreciation expense (rent) on the right-to-
use the property and interest in the balance sheet as the lease liability (KPMG, 2018, np). The
effect of this is that the EBITDA will increase because the previous costs that were included as

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operating expenses will be added back as interest and depreciation and transferred to the balance
sheet as a liability. This can be appealing to you as the investor because the increase in EBITDA
in an entity suggests good financial performance which might not be the case. If EBITDA is the
only indicator of a firm’s performance, a lot of care should be taken as it is most likely that it
will be ‘’grossed up’’. However, in my view, I believe that the overhaul brought about by the
AASB 16 standards would result in a reporting that would be beneficial to the users of both Rio
Tinto’s and BHP’s Financial statement.
Effect on Other Ratios
The new AASB 16 standard is going to affect all of the most commonly used financial
ratios such as the asset turnover, the interest cover, ROCE, EPS, ROE and the operating cash
flows. First of all, the balance sheet is going to grow while the capital and gearing ratios decrease
(Mills, 2017, np.). Since BHP and Rio Tinto will be involved with the leasing of ‘big tickets'
assets, the companies are going to be greatly affected. As a result, the changes will also affect the
credit ratings, borrowing costs and loan covenants which might result in behavioural changes for
BHP and Rio Tinto. The effects will also compel both organizations to reassess their lease
agreements over make or buy decisions. Appendix 1 shows the financial statements for BHP
AND Rio Tinto which are heavily affected by the lease standard changes once it becomes
effective because the company's do not fall under the exceptions of the ‘low-value assets' which
are not recognized on the balance sheet ((BHP Billiton, 2018 np.; Riotinto.com, 2018, np).
Sustainability Reports by BHP and Rio Tinto
As a way of showing openness, diversity relationships and mutual concern for the
community in which they operate, BHP and Rio Tinto have disclosed and reported about the

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social and environmental aspects of their operations. Apart from the major Sermarco dam
disaster that really discredited the reputation of BHP Billiton in 2015, the corporation has been
determined to put health and safety of the workers and the community ahead trough
environmental responsibility by supporting the communities in environmental conversation.
(BHP Annual Reporting, 2017, pp 30; Riotinto.com. Annual report, 2017, pp28). Mining
companies in Australia are required to adhere to the sustainability reports frameworks developed
by GRI and OECD. The regulatory requirements have therefore compelled the companies to
report and disclose all the environmental impacts that their operations bring to the environment.
BHP have tried to adhere to the regulations by reporting their decarbonization strategies which
are a move towards an environment with low-carbon emission. The company according to their
2017 reports is concerned about the environmental risks that come with increased diversification
of energy sources (Globalreporting.org. BHP Sustainability Report, 2017, np).
Summary
In Summary, the new AASB 16 standards are expected to bring an overall overhaul in the
accounting for leases. As a matter of fact, the introduction of a single lessee accounting model
where the company seeking a lease is expected to bring all the assets and liabilities of the lease to
the balance sheet is a drastic change to many companies. Rio Tinto and BHP Billiton is not an
exception to this. Moreover, the recognition of a leased asset will change from an operating lease
to the right-of-use of an asset a term which represents that the company has acquired the right to
use a certain leased asset and will be paying lease liabilities according to the terms of the lease
agreement. This means that the changes proposed by the new standard are intended to enhance
the disclosures of leases for both the lessors and the lessees thereby improving the information

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being disclosed in the annual reports for companies exposed to leased properties as discussed
above.
References
KPMG. (2018). AASB 16: Leases. [online] Available at:
https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-leases-standard.html
[Accessed 3 May 2018].
Aasb.gov.au. (2018). Accounting standards. [online] Available at:
http://www.aasb.gov.au/Pronouncements/Current-standards.aspx [Accessed 2 May
2018].
BHP Billiton. (2018). BHP Annual Reporting 2017. [online] Available at:
https://www.bhp.com/investor-centre/annual-reporting-2017 [Accessed 2 May 2018].
Chapple, S. (2016). Book review: Aiming for Global Accounting Standards: The International
Accounting Standards Board, 2001–2011CamffermanKeesZeffStephen AAiming for
Global Accounting Standards: The International Accounting Standards Board, 2001–
2011, Oxford: Oxford University Press, 2015, 688 pp; 9780199646319. Accounting
History, 21(2-3), pp.364-365.
Deegan, C., Doupnik, T., Ivancevich, J., Luthans, F., Mintz, S., Lawrence, A. and Steiner, J.
(2012). ACCG399. North Ryde, N.S.W.: McGraw Hill.
Globalreporting.org. (2018). BHP Sustainability Report 2017. [online] Available at:
https://www.globalreporting.org/Pages/FR-BHPBilliton-2017.aspx [Accessed 3 May
2018].

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Martin, R. (2017). The effects of the new leasing standard are wider than you might think. RSM
Australia. Retrieved 2 May 2018, from https://www.rsm.global/australia/insights/ifrs-
news/effects-new-leasing-standard-are-wider-you-might-think
Michelle Gibbs, E. (2018). AASB 16: Overhaul of lessee accounting effective 2019. [online]
KPMG. Available at: https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-
fundamental-overhaul-lessee-accounting.html [Accessed 3 May 2018].
Mills, J. (2017). Thoughts on the impact of changes to AASB 16?. [online] Intelligent Investor.
Available at: https://www.intelligentinvestor.com.au/thoughts-on-the-impact-of-changes-
to-aasb-16-1878181 [Accessed 2 May 2018].
Bdo.com.au. (2018). New leases standard. [online] Available at: https://www.bdo.com.au/en-
au/accounting-news/accounting-news-february-2016/new-leases-standard [Accessed 2
May 2018].
KPMG. (2018). AASB 16: Leases. [online] Available at:
https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-leases-standard.html
[Accessed 2 May 2018].
KPMG. (2018). Financial Reporting & Accounting Standards. [online] Available at:
https://home.kpmg.com/au/en/home/services/audit/financial-statement-audit/financial-
reporting-accounting-standards.html [Accessed 2 May 2018].
Riotinto.com. (2018). Annual report. [online] Available at:
http://www.riotinto.com/investors/annual-report-16577.aspx [Accessed 2 May 2018

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Appendixes
Appendix 1: BHP Billiton 2017 Financial Statements
5.1.1 Consolidated Income Statement for the year ended 30 June 2017
2017 2016 2
015
Notes US$M US$M U
S$M
Continuing operations Revenue
1 38,285 30,912 44,636
Other income 4 736 444 496
Expenses excluding net finance costs 4 (27,540) (35,487) (37,010)
Profit/(loss) from equity accounted investments, related impairments and expenses 29 272 (2,104) 548
Profit/(loss) from operations 11,753 (6,235) 8,670
Financial expenses (1,574) (1,161) (702)
Financial income 143 137 88
Net finance costs 20 (1,431) (1,024) (614)
Profit/(loss) before taxation 10,322 (7,259) 8,056
Income tax (expense)/benefit (3,933) 1,297 (2,762)
Royalty-related taxation (net of income tax benefit) (167) (245) (904)
Total taxation (expense)/benefit 5 (4,100) 1,052 (3,666)
Profit/(loss) after taxation from Continuing operations 6,222 (6,207) 4,390
Discontinued operations
Loss after taxation from Discontinued operations 27 – – (1,512)
Profit/(loss) after taxation from Continuing and Discontinued operations 6,222 (6,207) 2,878
Attributable to non-controlling interests 332 178 968
Attributable to BHP shareholders 5,890 (6,385) 1,910
Basic earnings/(loss) per ordinary share (cents) 6 110.7 (120.0) 35.9
Diluted earnings/(loss) per ordinary share (cents) 6 110.4 (120.0) 35.8
Basic earnings/(loss) from Continuing operations per ordinary share (cents) 6 110.7 (120.0) 65.5
Diluted earnings/(loss) from Continuing operations per ordinary share (cents) 6 110.4 (120.0) 65.3
Dividends per ordinary share – paid during the period (cents) 17 54.0 78.0 124.0
Dividends per ordinary share – determined in respect of the period (cents) 17 83.0 30.0 124.0
The accompanying notes form part of these Financial Statements.

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5.1.3 Consolidated Balance Sheet as at 30 June 2017
2017 2016
Notes US$M US$M
ASSETS
Current assets
Cash and cash equivalents 19 14,153 10,319
Trade and other receivables 7 2,836 3,155
Other financial assets 21 72 121
Inventories 9 3,673 3,411
Current tax assets 195 567
Other 127 141
Total current assets 21,056 17,714
Non-current assets
Trade and other receivables 7 803 867
Other financial assets 21 1,281 2,680
Inventories 9 1,095 764
Property, plant and equipment 10 80,497 83,975
Intangible assets 11 3,968 4,119
Investments accounted for using the equity method 29 2,448 2,575
Deferred tax assets 13 5,788 6,147
Other 70 112
Total non-current assets 95,950 101,239
Total assets 117,006 118,953
LIABILITIES
Current liabilities
Trade and other payables 8 5,551 5,389
Interest bearing liabilities 19 1,241 4,653
Other financial liabilities 21 394 5
Current tax payable 2,119 451
Provisions 3, 14, 18, 24 1,959 1,765
Deferred income 102 77
Total current liabilities 11,366 12,340
Non-current liabilities
Trade and other payables 8 5 13
Interest bearing liabilities 19 29,233 31,768
Other financial liabilities 21 1,106 1,778
Deferred tax liabilities 13 3,765 4,324
Provisions 3, 14, 18, 24 8,445 8,381
Deferred income 360 278
Total non-current liabilities 42,914 46,542
Total liabilities 54,280 58,882
Net assets 62,726 60,071
EQUITY
Share capital – BHP Billiton Limited 1,186 1,186
Share capital – BHP Billiton Plc 1,057 1,057
Treasury shares (3) (33)
Reserves 16 2,400 2,538
Retained earnings 52,618 49,542
Total equity attributable to BHP shareholders 57,258 54,290
Non-controlling interests 16 5,468 5,781
Total equity 62,726 60,071
The accompanying notes form part of these Financial Statements.

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Rio Tinto 2017 Financial Statements

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Group income statement
Years ended 31 December
Note
2017 2016
US$mUS$m
Consolidated operations Consolidated
sales revenue 2,3 40,030 33,781
Net operating costs (excluding items shown separately) 4 (26,983 ) (26,799 )
Impairment charges 6 (796 ) (249 )
Net gains on disposal of interests in businesses Exploration and
evaluation costs
2,37
13
2,344 515
(497 )(445 )
(Loss)/profit relating to interests in undeveloped projects
Operating profit
13 (15 ) 44
6,79514,135
Share of profit after tax of equity accounted units 7 339 321
Profit before finance items and taxation 14,474 7,116
Finance items
Net exchange (losses)/gains on external debt and intragroup balances 24 (601 ) 611
Net gains/(losses) on derivatives not qualifying for hedge accounting 33 (24 )
Finance income 8 141 89
Finance costs 8 (848 ) (1,111 )
Amortisation of discount
Profit/(loss) before taxation
Taxation
Profit/(loss) after tax for the year
9
(383 ) (338 )
(773 )
6,343
(1,567 )
4,776
(1,658 )
12,816
(3,965 )
8,851
– attributable to owners of Rio Tinto (net earnings/(loss)) 8,762 4,617
– attributable to non-controlling interests (net earnings/(loss))
Basic earnings/(loss) per share
Diluted earnings/(loss) per share
10
10
89 159
256.9 c
255.3 c
490.4 c
486.9 c

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Group cash flow statement
Years ended 31 December
Cash flows from consolidated operations (a)
Note
2017 2016
US$m
11,368
US$m
16,670
Dividends from equity accounted units
Cash flows from operations
817 253
11,62117,487
Net interest paid (897 ) (1,294)
Dividends paid to holders of non-controlling interests in subsidiaries (399 ) (341)
Tax paid
Net cash generated from operating activities
(2,307 ) (1,521)
8,46513,884
Cash flows from investing activities
Purchases of property, plant and equipment and intangible assets 2 (4,482 ) (3,012)
Disposals of subsidiaries, joint ventures and associates 37 2,675 761
Purchases of financial assets (723 ) (789)
Sales of financial assets 40 582
Sales of property, plant and equipment and intangible assets 138 354
Net funding of equity accounted units (3 ) (12)
Acquisitions of subsidiaries, joint ventures and associates 37 - -
Other investing cash flows
Net cash used in investing activities
(18 ) 12
(2,104)(2,373 )
Cash flows before financing activities
11,511
6,361
Cash flows from financing activities
Equity dividends paid to owners of Rio Tinto 11 (4,250 ) (2,725)
Proceeds from additional borrowings 18 4,413
Repayment of borrowings (2,795 ) (9,361)
Proceeds from issue of equity to non-controlling interests 170 101
Own shares purchased from owners of Rio Tinto (2,083 ) -
Purchase of non-controlling interests 37 (194 ) (23)
Other financing cash flows
Net cash flows used in financing activities
(7 ) 104
(7,491)(9,141 )
Effects of exchange rates on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Opening cash and cash equivalents less overdrafts 21
(12 ) (35)
(1,165)
9,354
2,358

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Appendix 2
Ratio Analysis for BHP Billiton Ltd and Rio Tinto Ltd
Financial Ratio Formula $ millions $ millions
BHP Billiton Ltd RIO TINTO Ltd
Retun on Capital Employed (ROCE) 62,22/62,726= 9.9% 8851/51,115= 17.3%
Earnings per share (EPS) (6222-2911)/3211 = 1.03 (8851-0)/ 1,887 = 4.7
Return on Equity (ROE) 6,222/57,258= 10.9% 8851/44,711 =19.79%
Assests Turnover 38,285/117,006 =0.33 40, 030/95726 = 0.42
Earnings Before Interest and Tax 11, 753 14, 474݁ܰ ݐ ݋݋݋ܿ݊ܫ݁ܰ ݋ ݋ ݋݋݋ݐ
ݐ ݑݕݑݑݑݑݑݑݑݑݑݑݑݑݑ݋݁ܰ ݋ ݋݋ܿ݊ܫ݁ܰ  െܲ݁ܰ݁ܰ݁ܰ݀݁ݎ݅ܦ ݀݁ݎ ݅ܦ݀݁ݎ݁ܰ ݏݒݒݒݒݒݒݒݒݒݒݒݒݒݒ
݋ ݋݋ ݋ ݋ܥ ݄ܽݏ  ݏ݁ܰ  ݏ ݋ ݋݋݋݋݋݋݋ݐ ݑݐݏ݃݊݅݀݊ܽ ݀݁ݎ݅ܦ ݄ܽݏ݋݁ܰ ݋ ݋݋ܿ݊ܫ݁ܰ 
ܣ݄݁ܰܽݏ݃݊݅݀݊ܽ݁ܰݒݒݒݒݒݒݒݒݒݒݒݒݒ ݒ ݋݋ ݋݋݋ ݋ ݋݋݋ ݋݋ܵܿ݊ܫ݄݇ܿ݀݁ݎ݁ܰ  ݏ ݋ ݋ ݋ ݋ݐ ݑݕ݋݄݁ܰܵܽݏ݁ܰ   ݏ݋ ݋ܣ݄݁ܰܽݏ݃݊݅݀݊ܽ݁ܰݒܶ ݄ܽݏ ݐݐݐݐݐݐݐݐݐݐݐݐݐݐ ݋݋ܣݏ݁ܰ ݏ ݏ