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

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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