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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ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS 16)
Introduction:
The current paper elucidates the understanding of the new accounting standard for
lease and examines the impact of the new lease standard on the company and its financial
performance. The new lease standard is introduced to essentially eliminate the accounting
distinction between financing and operating lease. With this, there will be increased financial
liabilities sans leased assets on the balance sheet of lessee. Accordingly, there will be
significant impacts on the key financial metrics for the companies having material off balance
sheet lease commitments. Although, there will not be any increase in the value of equity,
there will be increase in the enterprise value of the companies. For the analysis purpose, one
of the companies has been chosen from the ASX named JB Hi-Fi which is the largest home
entertainment retailer based in Australia. The company is engaged in selling wide variety of
entertainment products such as mobile phones, wireless speakers, headphones, and laptop and
game consoles.
Discussion:
The new accounting standard on lease has come in effect for the period beginning
after 1st January or on the given date. JB Hi-Fi has pointed out their annual report published
for the year ending 30th June, 2018 that the AASB 16 will be effective in the financial
statement of the group for the year ending June 30, 2020 (jbhifi.com.au 2019). A
comprehensive model has been introduced by AASB 16 for the identifying the lease
arrangements and accounting treatment for both lessees and lessors. The current guidance on
lease will be superseded by AASB 16 along with all the related interpretations. The
distinction between the service and lease contracts is created by AASB 16 on the basis of
whether the customer controls the identified assets. In addition to this, the lease accounting
does not identify differences between the operating and financing lease. A model under the
new lease standard has replaced the existing model and the new model where the recognition
for the corresponding liability and right for used assets for all the leases have to be
recognized by lessees on their balance sheet. However, such recognition will not include
leases for low value and short term leases. For the remeasuremnt of lease liability, the
measurement of the right of use assets is done at cost and subsequently, the measurement is
done at the cost less impairment losses and accumulated depreciation. At the initial level, the
leased liabilities are measured at the value of lease payments that are not being paid at the

ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS 16)
date of lease agreement. The leased liability is adjusted for lease payments and interest
subsequently along with the impact of modification of lease (Guermazi & Khamoussi, 2018).
It is expected that the requirements of the new lease standard to recognize the related
lease liability and right of asset use is expected to create considerable impact on the amounts
that is recognized on the consolidated financial statements of the group. There will be impact
on the classification of cash flows because under AASB 117, the payments concerning
operating lease are presented as operating cash flow. On other hand, under the AASB 16, the
payment of lease will be split into an interest payment and principal that will be represented
as operating and financial cash flow respectively (Hladika & Valenta, 2018). Moreover, the
new lease accounting standard requires the reporting entity to make extensive disclosures.
From the analysis of the financial report of JB Hi-Fi, it has been ascertained that the
company has made progress in preparing the implementation of the new standard in number
of areas during the financial year 2018. Such areas include identifying necessary changes to
the processes and system that required accounting treatment and reporting the facts in
accordance with the new standard. Efforts were put in collation of data for the calculation to
assess the impact of new standard and identifying areas of judgment and complexities that are
relevant to the group (Chu et al., 2019). In addition to this, the initial estimates for identifying
the discount rates were also developed. There are a number of unresolved areas on which the
reliable estimate of the financial impact on the on the consolidated results of the group is
dependent. Such areas involve conclusion of data collection, refining the approach of
discount rate, transition method choice and approach refinement to discount rate.
In relation to the some minor operating lease and lease concerning with stores, the
group has entered into some operating lease agreement. Stores have been taken on lease for a
term of between 5 to 15 years with an option to extent the period in some case. In the event of
the group exercising the option to renew, there are few clauses that are contained in the
market review clauses. Regarding the lease term and arrangement, the company opt for the
short term leased where appropriate which is considered as one of the strategies opted by
organization to drive growth. The leasehold improvement is stated at the cost that is less of
impairment and accumulated depreciation (Agyei, 2017). In addition to this, the provision of
lease by the group is their best estimate of the amount that is required to return the lease
premises to the original condition. Such estimation is done by considering the best estimate
of onerous lease obligations and past history of vacating stores. Costs comprised of