Analysis of Accounting Standard AASB 117 and AASB 16 for Lease

This assignment analyzes the old accounting standard AASB 117 and the new accounting standard AASB 16 for lease. It discusses the drawbacks of the old standard and the changes incorporated in the new standard. It also examines the impact of the changes on companies and the reasons for classifying lease contracts as operating leases. The implementation of IFRS 16 and its effect on comparability between companies are also discussed.

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ACCOUNTING
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Abstract
The aim of this assignment is the analysis of the old accounting standard of AASB 117 lease
and new accounting standard AASB 16 for lease. Under this, drawbacks that are associated
with the existing standard will be highlighted and discussed with the reference to its use by
the managers by misrepresenting financial statements that further misguide users of financial
report in taking crucial business decisions. In the analysis, it has been found that AASB 117
does not include the lease liability concepts as well as right of use the assets in the company’s
balance sheet that results in not showing actual position of financial position. Therefore, in
order to modify these problems, the new accounting standard has been introduced that is
AASB 16 with effect from January 1, 2019.

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Table of Contents
Introduction................................................................................................................................3
Critical Evaluation of Old Accounting Standard for Lease...................................................3
Necessity for the changes in Accounting Standard for Lease................................................4
Changes Incorporated in New Accounting Standard AASB 16............................................5
Companies affected by Changes in Lease Standard..............................................................6
Reasons for Classifying Lease Contract as Operating Lease.................................................7
Implementation of IFRS 16and Expectation of Improving Comparability between
Companies..............................................................................................................................8
Implementations of AASB 16 on the Leasing Market.........................................................10
Disclosures by the Company of AASB 16 from AASB 117...............................................11
Conclusions..............................................................................................................................11
Reference..................................................................................................................................13

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Introduction
The aim of this assignment is to do the analysis on the Accounting standard for
lease.Leases are the contracts under which assets owners allows the other party for using the
assets or the property in exchange for the money. The International Accounting Standards
Board has issued IFRS 16 Leases that requires the lessees for recognizing the assets and the
liabilities for most of the leases (Morales-Díaz and Zamora-Ramírez 2018). Hence, under this
assignment discussion will be done on critical evaluation of the old lease accounting standard
(AASB 117), reasons for the necessity of change and changes that are incorporated in the
new accounting standard. Moreover, discussion will be on companies having significant level
of lease financing is affected by the change in lease accounting standard. Further, the reasons
for the tendency of the of the company for classifying most of the lease contract as operating
contract and relation of positive accounting theory with the managers behavior will be
discussed. In addition, implementations of IFRS 16 and its effect on the lease market will be
discussed. Lastly, key disclosure by the Premier Investment Limited on the accounting
standard of lease will be discussed. Premier Investment Limited is the Australian based
company under different specialty retail fashion chains (Premier Investments. 2019).
Critical Evaluation of Old Accounting Standard for Lease
Accounting standard AASB 117 aims for prescribing for the lessees and the lessors,
the accounting policies as well as the disclosures that apply in the relation to the leases. This
standard was incorporated because it has provided the ease for working of the accountant in
order to provide the regulations and rules for accounting of lease. AASB 117 applies for all
the leases except for the leases for exploring for or the uses of oil, minerals, natural gas and
non-regenerated resources. The standard also does not apply to the licensing agreements for
the items such as copyrights, patents, motion picture films, plays, video recordings and
manuscripts (Aasb.gov.au. 2019).

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In this accounting standard, there is obligation for making the future payments under
the arrangements of operating leases is not included in the balance sheet, even though there is
commitment by the company for those expenditures of future. It was because of this, many
stakeholders were having the concerns that it does not give the accurate reflection of the true
financial position of the company. This has resulted in the situation of major changes in the
market as well as shares prices of the company and they were not able to satisfy the
stakeholders’ expectations (Lessambo 2018).
The question whether classification of lease as capital lease or the operating lease has
the major impact in the other issues of the capital lease capitalization as well as disclosures of
the operating leases by the lessees. Until and unless there is clarity of the distinction between
the operating lease and finance lease, lessee may not be required for the capitalization of the
lease. Hence, it has created the inconsistency in the accounting for the arrangements for
meeting the lease definition (Xu, Davidson and Cheong 2017). As per AASB 117, the
structure of operating lease is in the form of the accounting of off-balance sheet that means
that the obligations of lease are not reported as the liability in balance sheet. This has aroused
the claims from the critics that the result of the desirability of classification of operating lease
and the parties of lease structures the leases in such way for avoiding accounting of capital
lease by the thin margin and using it as the sources of the off balance-sheet financing. This
creates the sources of the unrecognized financing that makes it difficult for the users for
understanding (Wong and Joshi 2015).
Necessity for the changes in Accounting Standard for Lease
There was the necessity for the incorporation of the changes in the new accounting
standards for the lease of AASB 16 because accounting treatment required under AASB 117
lease has raised many concerns by the users of the financial statements as well as the
investors regarding usefulness of provided information. It is because of not including the

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future payments obligations on the balance sheet, the true financial position of the company
was not included. Apart from that, there was frequent understating of lease obligations as
well as the adjustments were inconsistent. Hence, lack of the transparency that was caused by
the classifications rules of current lease as well as resulting lease structuring, which has
occurred for avoiding meeting those rules created the significant problems for the users in the
assessment of the true financial position of the company. The representations of the fake view
of the financial position of the company has created dilemma in the minds of the
stakeholders, they started making decisions based on incomplete and false financial report
(Glasscock, Ainsworth and Shimpa 2016). The company losses trust of the majority of the
shareholders. All these concerns and the problems has forced Australian Accounting Standard
Board for replacing the accounting standard AASB 117 lease with the new accounting
standards AASB 16 leases. In the new accounting standards the problems faced in the old
standards was revised and resolved for safeguarding the stakeholders interests. This new
accounting standard will be helpful for the company for presenting, formulating the correct
financial statements for the usefulness to the stakeholders (de Albuquerque et al. 2017).
Changes Incorporated in New Accounting Standard AASB 16
The new accounting standard for lease AASB 16 has incorporated the changes, which
has impacted the way the leases of operating have been accounted for in the balance sheet of
the company.Substantial changes has been done to the lease accounting by the Australian
Accounting Standards board with the AASB 16 Leases with the headline changes of removal
of distinction between the operating as well as finance and the operating leases for the lessees
with the most of the leases coming in the balance sheet. This new standards has significant
impacts on the companies that may not be always obvious at the first sight immediately. The
changes in the new accounting standards will be resulted into the inclusion of lease liability
as well as rights for using assets on balance sheet. The changes will give much accuracy of

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the financial position representations of the business by reflecting fully all the liabilities as
well as it provides more of useful information in the financial reporting for the shareholders
and investors. The new accounting standard of lease will affect almost all the businesses to
some extent. The key feature of new standard is to be proactive (Aasb.gov.au. 2019).
One of the major difference between AASB 117 and AASB 16 is the differences in
the measurement and methodology of lease of the company. According to AASB 16, leases
are divided into two parts, which are lease contract and service contract. This standard helps
in providing leases in balance sheet that is even in the situation where the entity realizes lease
of the certain part of lease of assets. It splits payments of lease into lease element and non-
lease element. AASB provides single accounting model for the every lease of the leases.
Under AASB 16, there is the exemption from the rule of lease of the short-term assets and
lease of low value of company (Joubert, Garvie and Parle 2017).
Companies affected by Changes in Lease Standard
The accounting standard of lease AASB 117 states that in case if the leases do not
qualify for the capital assets then in that case they are recognized as operating lease and on
the monthly basis, the recognition of payments is done as expenses of rent.Although, the
amendments to the AASB 16 will change the operatinglease accounting treatment.Initially
the assets as well as the liability will be measured at the present value of the payments of
lease (Dakis 2016). The measurement of this present value is done with the help of the
incremental borrowing rate of lessee or the discount rate that are implicit in the lease. Hence,
with the help of the amount of the lease payments, there will be reduction of the liability and
depreciation of the assets. Although, in the case when there is the less than 12 months term of
lease, then the lessee will be allowed for making the election of policy of accounting for not
recognizing the liabilities and the assets.For leases, associated parties as well as month to
month leases, it is important for determining that the arrangements are done on the basis of

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month to month (Niescho 2018). There are certain long-term lease indications, which are as
follows:
 Lessee provides guarantee for the obligations of lessor.
 Lessee helps in delivering the required cash flows for the lessor and they have the
only the user of the right to the use assets.
 For the relocations of the new facility, it will be economically descriptive for the
lessee.
 Leases make the improvements to the property and these improvementsare
depreciated over more than one year.
In the absence of these criteria, leases of month-to-monthwill be reported into the
guidance for the assets right-to-use and it will record the liability associated. AASB 16 will
change the certainty of recording the cost of lease (Giner, Merello and Pardo 2018).
Reasons for Classifying Lease Contract as Operating Lease
Operating lease allows for using the assets but it does not convey the assets ownership
rights. It is generally counted as the off-balance sheet financing that means leased assets as
well as liabilities associated of the rent payments of future are not included in the balance
sheet of the company for keeping debt to equity ratio low.Lessee most often likes to treat the
lease as operating lease as compare to finance lease (Holland 2016). In case if the company
considers finance lease then assets and liability of the leasewill be shown at the fair value in
the financial statements. It results in the situation that there will be adverse effect of the
company’s gearing ratio. In the early years of lease, the expenses recognized are
comparatively high. Based on opening liability, the interest expenses are high in early years
because liability amount are higher. The amount along with the charges of the depreciation.in
relation to the leased assets results into the increase for expenses if it is treated as operating

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lease. In this situation, company may seek for reporting higher profits in the initial years
(Murthy and Jack 2014).
Positive Accounting Theory for this manager’s behavior
Finance lease capitalization have significant impact on recorded numbers of
accounting that in turn affects the basic contract among the managers as well as
shareholders.There are the expectations that a manager selects the treatments of off balance
sheet, in order to avoid the negative impact of the economy. It has been observed that
managers generally make the arrangement in which they transfers leases to operating lease
from the finance lease. This treatment by the managers violates positive accounting theory by
misguiding the users of financial statements (Miah 2017).
Implementation of IFRS 16and Expectation of Improving Comparability between
Companies
IASB makes the expectation of IFRS 16 for significantly improving comparability of
the financial information. This occurs because the companies will help in following points:
 Recognizing only rights obtained as well as the liabilities, which are incurred by the
lease.
 Measuring all the lease assets as well as lease liabilities in similar ways.
 Recognizing in essence assets and the liabilities for all the leases.
This results in reflecting differingdecisions of operating in the financial statements that
are made by the various companies. In case the lease is similar economicallyto the borrowing
for buying the assets then the amount that are reported by applying IFRS 16 will be same to
the amount, which would be reported in case when the company will borrow to buy (Lee,
Gyung Paik and Yoon 2014).

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Airline A (leases less than 20% of
the aircraft)
Reporting on the
balance sheet
(IAS 17)
In Case all the
leases are on
balance sheet
(IFRS 16)
Long-term
liabilities
14,000 20,000
Equity 6,700 6,500
Property,
Equipment and
Plant
17,000 19,900
Ratio of long-
term debt to
equity
2.8:1 3.07:1
Figure1: Estimated Effects of Off balance sheet leases for Airline A

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Airline B (Leases 80% of the
aircraft)
Reporting on the
balance sheet
(IAS 17)
In Case all the
leases are on
balance sheet
(IFRS 16)
Long-term
liabilities
9,500 19,000
Equity 5,500 5,100
Property,
Equipment and
Plant
15,000 24,000
Ratio of long-
term debt to
equity
1.72:1 3.72:1
Figure2: Estimated Effects of Off balance sheet leases for Airline B
The table shows above sets the estimated effects of the leases of off balance sheet for
the two airline companies. The key information that is used by the investors as well as the
analyst such as assets and the liabilities can be affected significantly by the off balance sheet
of the leases treatments. The application of the IAS 17 makes the revelation that airline A is
having higher financial leverage level as well as higher assets base level in comparison with
airline B (Kusano 2018).
Implementations of AASB 16 on the Leasing Market
The consideration of whether the IFRS 16 gives rise to the behavioral changes, which
would affects the market of leasing. For example, due to the requirements of lessee
accounting in the IFRS 16 provides the greater comparability between those who leases the

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assets and those who borrows for buying the assets, hence, the company may decides for
buying the assets rather than leasing them. In case if the company decides for buying more
assets, they lease fewer assets if there is change in the accounting that is acknowledged by
IASB (Öztürk and Serçemeli 2016).
Disclosures by the Company of AASB 16 from AASB 117
Premier Investment Limited applies AASB 16 Leases that replaces AASB 117 leases.
This standard provides the comprehensive model for identifying arrangements of lease as
well as its treatments in the financial statements. The company has recognized the new assets
as well as liabilities for the leases that are currently are in the classification of operating
leases. The incentives of the operating leases are recognized as the liability when it is
received and it is subsequently reduced by allocating the payments of lease between the
expenses of rental and the reducing of the liability. Moreover, the expenses nature that are
related to those particular leases will be now changed as the accounting standard of AASB 16
that replaces expense of straight line operating lease with the charges of depreciation for the
right of using the interest expenses and assets on the lease liabilities. The accounting
treatment of the lease is provided in the note 23 of the financial statement in the annual
reports (Premierinvestments.com.au. 2019).
Conclusions
Therefore, it is concluded from the analysis that old accounting standard on lease
AASB 117 has so many limitations. Under this standard, there were no differences between
the financial lease and the operational lease for the lessees. Further, it has been analyzed that
managers are engaged in the arrangements of making lease contracts with lessors and then
transferring leases from the financial leases to the operating leases. This has resulted into the
accounting treatment of the lease by the managers that has misguided the users of the
financial statements. Therefore, it resulted into the violations of the positive accounting

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theory. Hence, in order to overcome all the shortcomings, new accounting standards for lease
AASB 16 has been introduced that has helped in making the accounting practices that meets
the need of the company and interests of the stakeholders.

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Reference
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Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
de Albuquerque, F.H.F., Marcelino, M.M., Rodrigues, N.M.B. and de Almeida Cariano,
A.J.R., 2017. Accounting for lease transactions: analysis of possible lobbying in the issuing
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capitalization with dynamic Monte Carlo simulation. Journal of Business Research.
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models. Journal of Air Transport Management, 55, pp.185-192.
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