Accounting for Leases

This paper analyses the potential effects of AASB 16 on the financial position and performance of CSR Limited. It also assesses whether AASB 16/IFRS 16 improves financial reporting. The report provides recommendations for exploring the ways that would assist CSR Limited in applying this new standard.

Running head: ACCOUNTING FOR LEASES
Accounting for Leases
Name of the Student:
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1ACCOUNTING FOR LEASES
Executive Summary:
The organisation selected for meeting the goal of this paper is CSR Limited, which is listed in
ASX having adequate compliance with IFRS and AASB standards. The financial statements of
CSR Limited would undergo various changes owing to the implementation of AASB 16. The
management of the organisation is required preparing the financial reports on balance sheet for
lease assets as well as lease liabilities and it is estimated that the amounts of both the items
would increase. However, the management burden could rise. Finally, it has been analysed that
CSR Limited would be able to form a favourable brand image in the eyes of its stakeholders.

2ACCOUNTING FOR LEASES
Table of Contents
Introduction:....................................................................................................................................3
a. Description of leases of CSR Limited and overview of the new rules, AASB 16:.....................3
b. Analysis of the potential effects of AASB 16 on financial position and performance of CSR
Limited:............................................................................................................................................4
c. Assessment of whether AASB 16/IFRS 16 improves financial reporting:..................................5
d. Conclusion and recommendations:..............................................................................................6
References:......................................................................................................................................7
Appendix:........................................................................................................................................9

3ACCOUNTING FOR LEASES
Introduction:
AASB 116 is a new lease standard issued and formulated by the “Australian Accounting
Standards Board (AASB)’ and it is necessary for all the Australian firms to adhere to this
standard initiating from the start of the year 2019. The company selected for meeting the goal of
this paper is CSR Limited, which is listed in ASX having adequate compliance with IFRS and
AASB standards. CSR Limited is one of the leading Australian industrial firms manufacturing
building products with an employee base of 3,600 (Csr.com.au 2018). The report would analyse
the different types of lease agreements used by CSR Limited along with an overview of AASB
16 compared to AASB 117 from lessee’s perspective. Moreover, AASB 16 would be evaluated
critically to find out its impact on the financial performance and position of the concerned
organisation. Lastly, this report would shed light on providing recommendations for exploring
the ways that would assist CSR Limited in applying this new standard.
a. Description of leases of CSR Limited and overview of the new rules, AASB 16:
CSR Limited is observed to use a combination of finance lease and operating lease.
According to Dakis (2016), finance lease denotes a lease where risks and rewards are passed
over substantially incidental to the ownership of asset irrespective of the eventual transfer of the
asset title. In accordance with the 2018 annual report of CSR Limited, no evidence of finance
lease could be found, as it has settled its finance lease payments. Operating lease uses the
straight-line method to realise it in the form of an expense over the lease period. The operating
lease and hire expenditure commitments have been $231.9 million in 2018 compared to $240.4
million in 2017 (Csr.com.au 2018). Presently, CSR Limited is involved in utilising AASB 117 in
order to develop accounting for lease with no intention of changing the model. The reason is that
certain issues are inherent in AASB 16 along with increased cost and administrative
accountabilities on the management from which no benefit would be made (Henderson et al.
2015). The detailed picture of operating lease commitments of CSR Limited is represented in
Appendix.
All organisations need to identify each lease as operating lease or finance lease, as
mandatory under AASB 117 (Aasb.gov.au 2018). This creates a situation, in which the users

4ACCOUNTING FOR LEASES
might be misguided while carrying out financial analysis of the organisation. Along with this,
this standard does not fulfil the user expectations, since it would provide a faithful depiction of
lease transactions. Since lease assets and lease liabilities are not appreciated on the balance sheet
statement owing to off-balance sheet leases, the accountants find it easy to hide and manipulate
financial information. This would assist in representing favourable financial condition of the
organisation in order to attract new investors for drawing adequate funds.
On the other hand, AASB would help in bringing certain changes that would reflect exact
representation of the financial position of the entity by applying on-balance sheet leases. The
realisation of lease assets and lease liabilities on the statement of financial position measured
initially utilising the present value of unavoidable future payments of leases, lease depreciation
and interest is to be represented on the income statement of the firm over the lease term
(Aasb.gov.au 2018). In addition, it is necessary to segregate the cash payment into a principal
amount based on the financial cash flows. Therefore, this new standard is bound to bring certain
changes in the financial statements of CSR Limited.
It is necessary for the lessees to reveal information by complying with AASB 16. When
the financial statements are prepared, the lessees are needed to use their own judgements. This
would help in segregating between the types of information required so that the goals of the
financial statement users could be fulfilled. Hence, the users could begin evaluating the effect of
lease on the financial reports of the organisation.
b. Analysis of the potential effects of AASB 16 on financial position and performance of
CSR Limited:
Effect on balance sheet statement:
The financial statements of CSR Limited would undergo various changes owing to the
implementation of AASB 16. The management of the organisation is required preparing the
financial reports on balance sheet for lease assets as well as lease liabilities and it is estimated
that the amounts of both the items would increase. The reason is that the recognition of assets,
which are not recognised previously, would raise the lease amount of the asset definitely and for
lease liabilities, the situation would be identical as well. In addition, AASB 16 does not segregate

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lease assets and lease liabilities. Furthermore, the lessees could bring right-of-use asset and the
balance sheet statement would disclose lease liability in relation to all leases.
At present, CSR Limited has operating lease commitments valued $231.9 million
disclosed in its annual report and it is reported by fully conforming to AASB 117 guidelines.
Hence, the balance sheet statement of the organisation is not affected by this amount, since
income statement is used for adjusting lease-related transactions (Joubert, Garvie and Parle
2017). However, AASB 16 requires CSR Limited to capitalise operating lease commitments on
the statement of financial position of the firm. Another considerable effect would be inherent, in
which the liabilities and assets of the organisation would rise and the balance sheet statement
might reflect impact on covenants associated with debt-to-equity ratio.
Effect on the income statement:
The guidelines mentioned in AASB 16 would impact the income statement of CSR
Limited in the following ways:
 Expense would be recognised belonging to portfolio lease and individual lease
 Reflection of lease expense
 Other effects
Since CSR Limited is deemed to contain off-balance sheet lease, this would lead to increase
in operating income of the organisation due to the implementation of AASB 16. The reason is
that when the standard is applied, the lease payment implicit interest would be represented for
the prior off-balance sheet lease as finance costs or interest expense (Tan‐Kantor, Abbott and
Jubb 2017). However, as per AASB 117, the off-balance sheet expenses are used to be included
as operating expense in the income statement. Hence, in accordance with AASB 16, the
operating margin ratio is estimated to rise, as operating income would increase significantly.
c. Assessment of whether AASB 16/IFRS 16 improves financial reporting:
By introducing AASB 16, all firms are required to include the cost of using lease assets
as well as balance sheet benefits. Therefore, correct representation of the financial position could
be disclosed because all liabilities are disclosed accordingly. With the help of such disclosures,
the investors could accumulate crucial information about the firms. In addition, the standard is

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estimated to raise integration among the various business departments related to lease contracts
(Wong and Joshi 2015). According to the GPFR objective, crucial information need to be
provided to the investors to assist in decision-making and this objective could be fulfilled with
the help of AASB 16, since it would disclose lease commitments appropriately to the investors.
In addition, the financial statements should be relevant and faithful, which are identified as two
qualitative characteristics of financial reporting. By including the relevant lease-related
information for the investors, the financial reporting quality could be improved. Furthermore,
CSR Limited could depict its lease commitments faithfully by using AASB 16 (Xu, Davidson
and Cheong 2017).
d. Conclusion and recommendations:
Based on the above discussion, some suggestions are provided to CSR Limited, which
would assist in preparation for adoption of AASB 16 and they are summarised as follows:
 CSR Limited is required to gather available information so that the disclosure
requirements of the new standard could be met.
 The existing systems of lease might not be able to collect the required data for the new
standard. Hence, a new system is to be in place so that the requirements of the new
standard could be fulfilled.
 All the possible consequences are to be considered due to changes in balance sheet
statement and income statement such as modifications in significant ratios as well as
profits.
 The leases and their associated terms and conditions are to be evaluated to obtain a closer
overview.
Hence, the new standard would result in significant change in the method of lease
accounting. However, the management burden could rise. Finally, it has been analysed that CSR
Limited would be able to form a favourable brand image in the eyes of its stakeholders.

7ACCOUNTING FOR LEASES
References:
Aasb.gov.au., 2018. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB117_08-15.pdf [Accessed 13 Oct.
2018].
Aasb.gov.au., 2018. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf [Accessed 13 Oct. 2018].
Csr.com.au., 2018. About Us | CSR . [online] Available at: https://www.csr.com.au/about-us
[Accessed 13 Oct. 2018].
Csr.com.au., 2018. Annual Meetings and Reports. [online] Available at:
https://www.csr.com.au/investor-relations-and-news/annual-meetings-and-reports [Accessed 13
Oct. 2018].
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. Journal
of New Business Ideas & Trends, 15(2), pp.302-315.
Tan‐Kantor, A., Abbott, M. and Jubb, C., 2017. Accounting Choice and Theory in Crisis: The
Case of the Victorian Desalination Plant. Australian Accounting Review, 27(3), pp.273-284.

8ACCOUNTING FOR LEASES
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key
ratios: Evidence from Australia. Australasian Accounting, Business and Finance Journal, 9(3),
pp.27-44.
Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating to
capitalised leases. Pacific Accounting Review, 29(1), pp.34-54.

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Appendix:
Operating lease commitments of CSR Limited in 2017 and 2018: