Accounting for Leases- The Impact of AASB (IFRS) 16

Running head: ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS) 16
Accounting for Leases- The Impact of AASB (IFRS) 16
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1ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS) 16
Abstract:
The essay is prepared with the intent to analyse the new leasing standard, which is AASB (IFRS) 16 as well as its
effect on different financial reporting areas of one of the leading retailers in Australia, Wesfarmers Limited. The
organisation has to report right-of-use assets and lease liabilities in its statement of financial position with certain
additional disclosures in accordance with the above-stated standard. It has been evaluated that the implementation of
the standard would raise the transparency and quality of financial reporting.

2ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS) 16
Introduction:
The presence of different funding sources could be observed for the business organisations, out of which
lease financing is one of them. Lease is deemed to be a significant source of long-term and medium-term financing,
in which the owner of a specific asset provides another individual with the opportunity of using that specific asset
compared to the periodic payments (Akbulut, 2017). There are of two types of leases, which include operating leases
and finance leases. The organisations are obliged to adhere to the AASB lease standards for accounting their leases.
In Australia, the organisations have to conform to the guidelines and norms of AASB 117 until 31st December 2018
for lease accounting purpose. However, in accordance with the “Australian Accounting Standards Board (AASB)”,
new lease accounting standard has been in effect from 1st January 2019, which is AASB 16 and all organisations
have to abide by this standard on compulsory basis. The objective of this essay is to analyse the various aspects of
the new leasing standard and the previous one. In addition, the essay would consider the evaluation of lease
accounting in Wesfarmers Limited and the effect of the standard on the financial reports.
Understanding of lease agreements and impact on financial reports:
According to AASB 117, the organisations are required disclosing information regarding their operating
leases. In case of operating lease, the lessor has the ownership of an asset for the entire term of lease; however, for
financial lease, the lessor owns the ownership even after the completion of the lease term (Aasb.gov.au, 2018). The
primary reason that AASB 16 has been put in place is due to the failure of AASB 117 in obliging the organisations
to disclose material amounts of operating leases in their statement of financial position.
AASB 16 has certain differences compared to AASB 117; however, the effect on lessors is almost minimal.
This standard requires categorisation of all lease contracts under leases. The lessees have to take into account the
current value of lease liabilities and right-of-use assets in their statements of financial position. However, this is not
applicable for short-term leases and leased assets having lower amounts. Besides, according to AASB 116 and
AASB 136, it is necessary to depreciate and impair right-of-use assets. For lease liabilities, there would be
recognition of interest according to AASB 140. Thus, both lessees and lessors have to conform to the disclosure
objectives under AASB 16 rather than rigorous checklists (Aasb.gov.au, 2018). The lessees have to disclose their
right-of-use assets appropriately in balance sheets accompanied by notes to the financial reports. Segregation is

3ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS) 16
necessary for finance costs and depreciation in the income statement and payments in the cash flow statements.
These payments mainly include cash payment on lease liabilities under financing activities, complying with interest
payment on lease liabilities in accordance with AASB 107 and payments for leased assets with lower values and
short-term leases (Cpaaustralia.com.au, 2019). Thus, the financial reporting quality is enhanced through these
changes and the financial transactions for leases could be represented faithfully, which ensures transparency in
financial reporting.
For instance, it is assumed that an organisation undertakes 20-year lease at a yearly rental of £1 million
with borrowing rate of 6% for recognising right-of-use assets and financial liability of £11.5 million discounted at
6% of future lease payments. In the beginning year, depreciation of £573,000 and interest cost of £688,000 would be
recognised in the income statement. This would lead to one year income statement expense of £1.26 million, which
is an increase compared to the rental expense of £1 million and this would be realised on simple operating lease
under AASB 117 (IAS 17). Moreover, the values of leased assets and leased liability would not be identical at the
beginning of the first year, as liability is higher and the impact would be on net assets. There would be reduction in
assets to £10.9 million owing to depreciation along with fall in liability to £11.1 million from £11.5 million due to
loan repayment (Refer to Appendix, Figure 1 for diagrammatic representation).
Overview of Wesfarmers Limited and its leases:
Wesfarmers Limited is the leading retailer operating in Australia and New Zealand and it is listed in
“Australian Securities Exchange (ASX)”. The organisation deals with different products like home improvement
suppliers, department stores, office supplies, energy, fertilisers, chemicals, safety products and others. At present,
Wesfarmers has staff base of above 100,000 and shareholders of nearly 495,000 (Wesfarmers.com.au, 2019).
From the annual report of Wesfarmers in 2018, it is identified that the organisation contains both finance
lease and operating lease and in order to classify them, it uses some judgements. The significant leased assets
include distribution and retail properties, offices, office equipment and motor vehicles. The leased assets are
categorised based on whether the organisation holds all rewards and risks associated with asset ownership. The
organisation does not have any financial lease in 2018. The details of operating lease are represented as follows: