AASB 16: Leases - Recognition, Measurement, Presentation and Disclosure

AASB 16 is an accounting standard issued by the Australian Accounting Standards Board (AASB) to make accounting for finance and operating leases easier. This standard recognizes, measures, presents and discloses leases. It classifies leases as finance or operating leases and provides guidance for manufacturer or dealer lessors. Subsequent measurement of finance income and impairment criteria are also discussed. This article provides a comprehensive understanding of AASB 16.

TABLE OF CONTENTS
INTRODUCTION........................................................2
OBJECTIVE................................................................2
CLASSIFICATION.......................................................2
Manufacturer or dealer lessors................................3
Subsequent measurement.......................................3

INTRODUCTION
Australian Accounting Standards Board (AASB) issued accounting standard
16 to make it easier for lessor and, lessee to do accounting for finance and
operating lease.AASB is a government agency under Australian Securities
and Investments Commission Act 2001.This standard also identifies the
entities to which it is applicable. Leasing is a very important aspect for many
corporate. It is a way of gaining access to ownership of assets without the
burden of finance and ownership over assets. The main objective to issue
this accounting standard is that the users of the financial statements are
aware of what leasing activities are going inside the entity.(Commonwealth
of Australia , 2016)
OBJECTIVE
The main objective of this standard is to recognize,measure,present and
disclosure of leases.All information should be provided in a proper manner
that can depict all those transactions which are true and fair in nature is the
main motive of this standard.This information is very useful to the users of
financial statement to analyze the impact of such lease on the financial
performace,cash position of the company.(Anon., 2016)
CLASSIFICATION
Two types of classification can be done by lessor as follows:
a) Finance Lease:A lease is characterized as finance lease if it transfers
all the risk and reward of ownership related to assets in which
ownership of assets prevail of lessor.
b) Operating Lease: A lease is characterized as operating lease if it
doesnot transfers all the risk and reward of ownership related to assets
in which ownership of assets prevail of lessor.

In order to analyze whether the lease is a finance lease or an operating lease
functions on the type of undertaken transaction other than contract form.
Few instances which can help to analyze or classified it as finance lease:
(Commonwealth of Australia , 2016)
a) If the lessee gets the ownership of the assets at the end of the lease
period
b) If the lessee has an option to buy the assets at a price which is lower
than its fair value price.
c) Even if the ownership is not transferred the major life of the assets is
used by the lessee.
d) The asset is such of nature that only lessee can use it if no major
transformation is done.
Manufacturer or dealer lessors
A. For finance lease the manufacturer or dealer lessor shall recognize all
following points in recognizing finance lease term:
a) Fair value being the revenue of the assets, or if the lease payment
which is accrued to the lessor is the fair value discounted using market
rate of interest.
b) The cost of sale of assets is the cost of assets or the amount at which
the assets is carried at the present location and place less the residual
value at present value if any.
c) The asset which is sold either at profit or loss i.e. the difference
between the revenue and the cost of sales of an assets. Recognition of
either profit or loss by the dealer or manufacturer lessor will be at the
start date regardless of the situation provided in accounting standard
board.
B. There is a choice offered by the manufacturer or dealer to customers
either to buy or take on lease. A finance lease can lead to either profit
or loss situation even if the sale is an outright sale adjusted with any
trade discounts.
C. In order to attract huge customers the lessor or manufacturer quotes
very less interest. Use of low rate will lead to manufacturer or lessor to

recognize an excessive portion of the income at the start date itself. If
the low interest rate quoted is not genuine or is artificial in nature,
than the manufacturer or dealer would account the assets on the basis
of market rate of interest.
D. Any cost incurred by the manufacturer or lessor in obtaining the
finance lease shall be treated as an expense costs at the start date
itself as they are mainly related to manufacturer earning or selling
price of the dealer. So it is excluded from the direct cost whatever
other cost spend by the manufacturer or lessor in association with
obtaining finance lease and so it doesnot form part of net investment
in the lease.
Subsequent measurement
A. The Finance income of the lessor shall be spread and recognized over
the lease period of the assets.
B. On a rational basis the manufacturer allocate the finance income over
the lease period. To cut the principal and the unearned finance income
the lessor apply the gross investment in lease against the lease
payment.
C. A lessor shall also apply the impairment criteria as stated in accounting
standard 9 in comparison to net investment. Alessor shall regularly
review the residual value which is not guaranteed and accordingly
treat the same, if there is a downgrade in the residual value the
manufacturer or lessor has to revise the lease period over the period of
lease term and it should be recognized immediately if there is any
reduction in respect of accrued amount.
D. A lessor shall classify under finance lease if it is only held for sale i.e.
Assets Held for Sale and Discontinued operations under accounting
standard 5.

Bibliography
Anon., 2016. www2.deloitte.com. [Online]
Available at: https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-
aasb-16-guide-220916.pdf
[Accessed 4 September 2018].
Commonwealth of Australia , 2016. Leases. [Online]
Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB16_AmendStd_02-16.pdf
[Accessed 4 September 2018].