Analysis of Leasing Accounting Standards and Impact

The provided report focuses on the critical evaluation of previous accounting standards for leases, specifically AASB 117. It discusses the drawbacks and changes that led to the implementation of a new standard, AASB 16, which replaces the operating lease with an operational lease as well as financial lease in company balance sheets. The report also highlights key disclosures required by companies in their financial statements due to this change.

Accounting
For
Leases

ABSTRACT
The Following report contains the detail information about the new accounting standard
AASB 16. Report also contains the information about the need for new accounting standards by
focusing in the drawbacks of the earlier accounting standards. It also states the various key
disclosure which the company has to mention in its notes to the position of its financial
statement.

Table of Contents
ABSTRACT.....................................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Critical evaluation of the old accounting standard for lease (AASB 117) and their drawbacks
................................................................................................................................................1
Why was the changes necessary.............................................................................................2
What changes have been incorporated in the new accounting standard for lease AASB 16. 2
How will companies that have significant level of lease financing be affected by the change in
the accounting standard before...............................................................................................3
Why did companies have a tendency to classify most of the lease contract as operating lease
and relate to positive accounting theory regarding to behaviour managers...........................4
Implement of IFRS 16 than compare between companies to lease assets and companies to buy
assets.......................................................................................................................................5
Implementation of AASB 16 might have an effect on the leasing market.............................6
Key disclosure the company has made on its accounting for lease including on the transitional
provision and effect of the transition to AASB 16 from AASB 117......................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
A lease is a preparation under which a lessor agrees to allow a lessee to control the use of
known property, plant and equipment for a declared period of time in exchange for one or more
payments. The ownership of the underlying assets is shifted to the lessee by the end of the lease
term. It is depended on the selection of the lessee are that a lease can be designated as either a
finance lease or an operating lease. The presented report aims to provide a clear understanding of
Accounting standard of lease. To understand the concept of the report selected company
Woolworth group limited which is a major Australian company with extensive retail interest
throughout Australian and New Zealand. There are critically examine about the new accounting
standard which is developed for lease financing AASB 16. Apart from the report discuss about
the drawbacks of old accounting standards as well as positive accounting theory related to
behaviour of managers. It further defined about implementation of IFRS 16 to improve
comparability between companies lease assets and borrow assets.
MAIN BODY
Critical evaluation of the old accounting standard for lease (AASB 117) and their drawbacks
The Australian Accounting standards board made accounting standard AASB 117 leases
under section 334 of the corporations act 2001 on 15 July 2004 (Kieso, Weygandt and Warfield,
2016). The main objective of the standard is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclose to apply in relation to leases. It is applied on prepare financial
reports according to part 2M.3 as per the corporation act. General purpose of the financial
statement to tackle of each other reporting regarding to entity. These financial statements are
held out to be and possible financial reporting analysis. The right of use asset will be non current
while the lease liability has been split between current and non current.
Drawbacks – There are mentioned drawbacks of old accounting standard foe lease which
is -
 The particular standard can not provide all appropriate information of lease in particular
balance sheet.
 AASB 117 has been carried forward to lesser model which can not work in effective
manner.
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 It can not permitted the netting of non resources debt and lessor is required to open up
additional information in AASB 16 in compared to AASB 117 on risk.
 The off balance sheet lease commitments in AASB 117 led to a significant lack of
information which is granted in listed companies to disclose.
 Through AASB 117 can not recognised right of use assets to put all balance regarding to
leases in the balance sheet.
Why was the changes necessary
There are need to changes into old accounting standards for lease due to following
reasons:
Disclosure of financial statements: Old accounting standards for lease fails to disclose
accurate picture of financial statements. Earlier, only capital leases were shown in balance sheet
where as operating leases appeared in footnote disclosures which leads to increase in engineer
leases in order to qualify operating leases (Paik and et.al., 2015). It results in disclosure of
financial statements where associated liabilities as well as assets were made mandatory to
disclose related to lease.
Profile of expenses: In old accounting standards for lease, expenses related to rental
charged no defined criteria was set which resulted in conflicts between lessee and lessor as well
as confusion in transfer of ownership. But with the change in time period and reducing conflicts
as well as confusion, various provisions were made necessary to change and resulted in defining
actual criteria for rental charges along with defining actual clarity of transfer of ownership for
the time period assets are used.
Defining lease terms: Lease terms includes non cancellable period as well as options for
cancelling or extending the lease. Old accounting standards lacks in clearly defining lease terms
in appropriate manner. This leads to make necessary changes in the accounting standards of lease
and resulted in clearly defining reassessing lease terms as well as conditions within the control of
lessee (Xu, Davidson and Cheong, 2017).
What changes have been incorporated in the new accounting standard for lease AASB 16
The AASB 117 for lessees classifies leases as either operating or financial leases on the
other side after apply the new AASB 16 removes the off balance sheet. In AASB 117 leases
divided and treating as all leases are financial leases. Moreover, the exemption applies to less
than 12 month leases (short term) and leases of low value assets. The Australian accounting
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standard board (AASB) has made considerable changes into lease accounting with AASB 16
leases. The changes in headline being the removal of the difference between operating and
finance leases for lessees with most leases now show in balance sheet. The new standard has
been influenced on entities which may not always be immediately obvious at first sight. It is
likely to affect to almost every business to some extent and there are point out most considering
thing with the new standard is to be proactive and to be prepared. The AASB has presented more
reliable presentation of the financial position of the business by fully reflecting on their liabilities
and it will provide all useful information in financial reporting regarding to investors and
stakeholders. There are coming changes that in the profit of the expenses and large increase in
metrics such as EBITDA. The new standard change the profile of the expenses rather than being
a straight line rental expenses. There will be more expenses in early years and less in later years
which can impact on the earning profiles.
How will companies that have significant level of lease financing be affected by the change in
the accounting standard before
A lease is a written agreement among two person is known as lessor who give property to
use and lessee who uses property after paying fixed amount. Lease financing is the most
important source of Wool worth company where the owner of wool worth give a property to
another organisation for right to use and charge payment. The Wool worth has option to use
significant level of lease financing that is described below-
Capital lease: Wool worth can use capital lease that is long term arrangement for
company that can not be cancel. In this lease the lessee need to record the leased item like assets,
present value of lease payment and balance sheet that help to get information about lease and its
time period. If there are any changes in accounting standard then it can affects company. Such as
if Wool worth accept the changes in accounting standard it has to bear high cost and time period
to prepare again lease agreement (Pawson, and et.al., 2016). As it need to appoint auditor for
evaluating the value of property the cost will be increases. In other side, if organisation do not
accept the changes in accounting standard then government can take legal action against
Woolworth.
Operating lease: The lease period in operating lease is shorter and can be cancel by the
offering of lessee with prior notice. This type of lease financi9ng is not good for company
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because it considers short period of lease. Woolworth can be cancel operating financing lease if
changes occurs in accounting standard and no legal action will not be created by government.
As discussed Woolworth has capital and operating level of lease finance which can affect
company if accounting standard are changed. Such as it has to prepare new lease agreement
according to new accounting standard and balance sheet otherwise government can take strict
action for liquidation.
Why did companies have a tendency to classify most of the lease contract as operating lease and
relate to positive accounting theory regarding to behaviour managers
Companies have a tendency to classify its most of the lease contracts as the operating lease
as while taking operating lease companies does not required show their operating lease in the
balance sheet which helped company to evade various taxes (Lamb, Erskine and Fletcher, 2015).
As per the AASB 117 only finance leases are required to be shown in the balance sheet and the
all the operating leases are to be treated as an expense by the company. Which helped company
to reduce its net profit resulting in the lower tax which was applicable on the companies. In this
accounting principles companies have evaded its tax liability and reduced its total profit by
adjusting the operating lease in the company’s income statement. After the implementation of
new accounting principle AASB 16 it states that any lease taken by a company whether
operational or finance is to be recorded in the balance sheet and are not be charged to the income
statement of the company. The previous accounting principle states that only the finance are to
be recorded in the balance sheet and the operational lease are to be charged to the income
statement of the company as an expense.
Positive accounting theory relates to the prediction about the events of the real world and
converting those various events to accounting transaction. It shows the behaviour of the
managers that they adopt to the new accounting principles and improve its operational efficiency
in order to increase its revenue and reduce its cost of production. In order to reduce the tax
liability of the company managers state most of the lease contact as an operational lease and
adjust them with income statements by showing it as an expense for the company which reduced
the total profit of the company for the year (Riccardi, 2016). With the help of this adjusting
operational lease from its income statement reduce the tax liability for the year of the companies.
Total tax paid by the companies are reduced due to the operational lease adjusting through the
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income statement of the company. In order to reduce its total tax liability companies showed
their lease contract as the operational lease.
Implement of IFRS 16 than compare between companies to lease assets and companies to buy
assets
The AASB 16 has been implemented in Woolworth to replace with existing accounting
requirement for lease under AASB 117 lease. As per the current requirement in company leases
are classified as per the their nature as well as finance lease. It has been identified through
consolidated statement of financial position and also operating leases. The result has been
identified that company has to record all of its lease whether operational or finance are to be
recorded in the balance sheet of the company (Dagwell, Wines and Lambert, 2015)The new
accounting standard issue by Australian Accounting Standard companies undergoing in any lease
contract whether operational or finance company has to show that lease in the balance sheet. The
operational lease which company has are to be shown on the asset side of the balance sheet of the
company and not in the income statement as an expense.
After the implementation of the new accounting standard i.e., Australian Accounting
Standards Board 16 lease accounting it has changed the overall accounting for lease accounting.
Earlier in the AASB 117 company undergoing in any operational lease shows it as an expense in
the income statement of the company. After the implementation of new accounting standard
AASB 16 it is mandatory for the companies to show its lease in the balance sheet, after this
implementation it is beneficial for the companies to purchase operational assets rather than
taking it on lease. If a company purchases operational asset company can later sell that asset
when it does not require it or the useful life of an asset is over, company can sell that for a scrap
value. Earlier it was beneficial for the companies to lease asset as it can show it in the income
statement and reduce its net profit resulting in reduction of tax liability of the company, but since
the new AASB 16 no company can show its operational lease in the income statement which will
increase the net profit of the company and actual tax which is payable can be applicable to the
companies. In Woolworth the operational lease which company have has to be shown in the
balance sheet of the company. It will be beneficial for the companies to purchase its assets so
that it can claim any tax advantage in the procurement of a fixed assets.
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Implementation of AASB 16 might have an effect on the leasing market
The implementation of Australian Accounting Standards Board 16 lease accounting had a
direct impact on the leasing market as this accounting standards has made it compulsory for the
companies to record its operational leasing to the balance sheet earlier companies used to adjust
its operational lease to the income statement and reduce its net profit with the subsequent amount
paid as an lease to the owner of the assets. After the implementation of AASB 16 companies can
not record its operational lease to its income statement rather it has to record it in the balance
sheet of the company. It is beneficial for the companies to purchase asset rather than taking it on
a lease. Companies started to purchase the assets which directly affected the leasing market as
purchasing of an assets gave it an advantage to sell the asset after the use and recover its
proportionate cost of an asset. It also gave an advantage to the companies to claim tax deduction
of the depreciation which was provided on that asset in order to reduce its total tax liability.
Companies started purchasing assets instead of taking assets on lease as taking asset on lease was
more costlier o the companies than purchasing of it. The new accounting standard issued by
Australian Accounting Standard Boards 16 made it compulsory for the companies to record its
operational lease on the asset side of the balance sheet of the company which reduced its
expenses and increase its net profit and total tax payable on it. Companies switched to purchase
its assets and claim deduction on the depreciation provided and can also recover the cost of
procurement by selling the machinery after the end of its useful life.
Key disclosure the company has made on its accounting for lease including on the transitional
provision and effect of the transition to AASB 16 from AASB 117
There are various key disclosures which company has to make on its accounting for lease as
per the Australian Accounting Standards Boards it is necessary for the company to disclose its
assets taken on lease in the statement of financial position of the company under the heading or
class which states the underlying assets. The main objective which is applicable for the
disclosure of assets taken on lease is that company has to show it in the note to the position of the
financial statement of the company. There are various disclosure requirement which are stated in
the paragraph 89 too 97 it also contains some addition disclosures which makes its necessary for
the companies to adhere to the disclosure objectives.
In Woolworth Ltd it is necessary for the company to adopt new accounting standards
issued by Australian Accounting Standards Board 16 company has to show its operational lease
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in balance sheet and also disclose it in the note to those statements that company has taken that
particular asset on a lease for certain year or a given specific period of time. As per the
Australian Accounting Standards Board 108 Accounting policies, change in accounting estimates
and errors, it contains the necessary requirements of the disclosure of change in accounting
standard for the company it has to mention it to its notes to finance statements that company has
changed its accounting standard from AASB 117 to AASB 16 lease accounting.
CONCLUSION
The above report establishes that the accounting standard for the lease accounting has
change from Australian Accounting Standards Board 117 to AASB 16 in which it is mandatory
for the companies to show its operational lease as well as financial lease in the balance sheet of
the company. The above report also states the critical evaluation of the earlier standards and its
drawbacks with reason to justify that why was this change necessary. It also establishes that what
are the changes which have been incorporated in the new accounting standards that is AASB 16,
its implementation and effect on the leasing market. It also discuses about the companies moving
towards the purchasing of assets instead of leasing it. This report also contains the various key
disclosure that company has to show in the notes of its position of financial statements.
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REFERENCES
Books and Journals
Kieso, D. E., Weygandt, J. J. and Warfield, T. D., 2016. Intermediate Accounting, Binder Ready
Version. John Wiley & Sons.
Paik, D. G. H., and et.al., 2015. The relation between accounting information in debt covenants
and operating leases. Accounting Horizons. 29(4). pp.969-996.
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.
Pawson, H., and et.al., 2016. Recent housing transfer experience in Australia: implications for
affordable housing industry development.
Lamb, D., Erskine, P. D. and Fletcher, A., 2015. Widening gap between expectations and
practice in A ustralian minesite rehabilitation. Ecological Management &
Restoration. 16(3). pp.186-195.
Riccardi, L., 2016. Accounting Standards for Business Enterprises No. 3—Investment Real
Estates. In China Accounting Standards (pp. 25-29). Springer, Singapore.
Dagwell, R., Wines, G. and Lambert, C., 2015. Corporate accounting in Australia. Pearson
Higher Education AU.
Mayorga, D. M. and Sidhu, B. K., 2012. Corporate disclosures of the major sources of estimation
uncertainties. Australian Accounting Review. 22(1). pp.25-39.
Baskerville, R. F., George, S. and Makale, K., 2018. The Landscape for Accounting Regulation
in NZ (Presentation Slides). Available at SSRN 2691137.
Ogilvy, S. and Vail, M., 2018. Standards-compliant accounting valuations of
ecosystems. Sustainability Accounting, Management and Policy Journal. 9(2). pp.98-
117.
Chambers, R. L. ed., 2014. An accounting thesaurus: 500 years of accounting. Elsevier.
Araújo, F. R., 2018. The nature of PIS/COFINS and the Brazilian general insurance sector: a
review of the nature of PIS/COFINS and their accounting treatment in the Brazilian
general insurance sector.
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