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
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS) 16
Abstract:
The essay provides a brief overview of the new leasing standard, AASB 16 and its potential effects on the practices
of Woolworths Group Limited, which is one of the leading retailers in Australia. With the help of AASB 16, it
becomes easy to enhance transparency and ensure faithful depiction of the financial statement of the lessees, as
leasing is a financing tool developing obligations. This standard needs the organisation to analyse leasing
agreements intensively, since it holds a considerable amount of operating leases, which would bring drastic
variations in the preparation of financial statements. Hence, Woolworths needs to start analysing the probable effects
of AASB 16 by accumulating data and preparing for new procedures to adhere to the standard along with
minimising the unanticipated effects.

2ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS) 16
Introduction:
The “Australian Accounting Standards Board (AASB)” has developed and issued AASB 16, which is a
new accounting standard for leases and it is mandatory for all the listed Australian organisations to adhere to the
same initiating from January 1, 2019. The paper would provide an overview of the different kinds of lease
agreements with special emphasis on the differences between operating lease and financial lease. In particular, the
essay would intend to analyse the different kinds of lease agreements in relation to Woolworths Group Limited,
which is a giant retailer in Australia after Wesfarmers Limited. In addition, a discussion regarding the value of
leases in the annual report of the organisation would be made in this paper as well. Along with this, the evaluation of
the new leasing standard, AASB 16 would be taken into consideration and it would be contrasted with the previous
leasing standards, AASB 17 to gain an overview of the probable effects of the accounting rules of leases on
Woolworths. Finally, the essay would shed light on gaining an insight of the lease agreements in the context of the
Australian retail sector along with lifecycle and stage of the lease.
Understanding of lease agreements, their impact on financial reports and comparison between operating and
financial leases:
In accordance with AASB 117, leases are of two types, which include operating lease and finance lease.
This model needs reporting of lease liabilities and assets on balance sheet only for finance lease. However, in case of
operating lease, AASB 117 needs the organisation in disclosing important information (Aasb.gov.au, 2018). In case
of operating lease, the asset ownership stays with the lessor for the overall lease term, while for finance lease, the
transfer of ownership after the end of the lease term stays with the lessee. However, AASB 117 does not fulfil the
needs of the users at the time of undertaking decisions from the financial statements, as the material amount related
to operating leases are not represented on the balance sheet statement. Hence, IASB has issued IFRS 16 Leases, after
which AASB has issued AASB 16 Leases.
Numerous changes are made from AASB 117 to AASB 16. However, there would be no change in lease
accounting for the lessors. In case of lessees, the significant change is the eradication of two lease categorisations,
which imply the new rule develops a single model of lease accounting. The contracts containing leases or are leased,
are categorised in the form of leases (Aasb.gov.au, 2018). All lessees need to realise all leases as present value of
lease liability and right-of-use asset in the balance sheet statement except leased assets having lower values and
short-term leases. Accordingly, there would be depreciation in right-of-use assets in compliance with “AASB 116
Property, Plant and Equipment” or there would be testing of the same with adherence to “AASB 136 Impairment of
Assets” or interest would be recognised on lease liability with conformance to “AASB 140 Investment Property”.
According to the new lease standard, the lessors and lessees are needed to fulfil the objective of disclosure,
instead of stringent checklists. The lessees need to present right-of-use assets distinctively from other assets and the
case would be similar in case of lease liabilities as well in the balance sheet statement or they need to be published

3ACCOUNTING FOR LEASES- THE IMPACT OF AASB (IFRS) 16
distinctively as notes to financial statements (Ahmed & Ali, 2015). There needs to be segregation of depreciation
expense and interest expense in the profit and loss statement and it is necessary for the lessees to categorise the
below-stated payments in the cash flow statement:
Cash payments on lease liabilities under financing activities
Payments from lower leased asset values and short-term leases
Compliance of interest payments related to leased liabilities with “AASB 107 Statement of Cash Flows for
interest paid”
The above changes have assisted in enhancing financial reporting quality and thus, faithful representation is
ensured in terms of timing, amount and correct presentation of cash flow activity for leases. Moreover, the users
could contrast the financial statements of the organisations without spending time on adjustments. Finally, AASB 16
would enable in developing increased transparency of the financial leverage level of the lessees (Beckman, 2016).
Overview of Woolworths Group Limited and the value of leases disclosed in its latest annual report:
Woolworths Group Limited is the leading Australian retailer placed after Wesfarmers Limited in Australia
and New Zealand. It is involved in operating through Australian Food, New Zealand Food, Big W, Endeavour
Drinks and other segments. Moreover, the organisation has 1,008 metro stores and supermarkets and 1,545 liquor
stores. It has been established in 1924 with workforce around 201,522 employees (Woolworthsgroup.com.au, 2018).
The organisation leases properties that include warehouses and retail premises and it is responsible for
expenses associated with leased assets like insurance, maintenance and taxes. Woolworths is involved in using both
finance lease and operating lease. Finance lease passes over the rewards and risks related to ownership of assets
even if there is mutual transfer of titles of the assets (Dagwell, Wines & Lambert, 2015). The non-current, unsecured
finance lease of the organisation has been nil in 2018, which was $2 million in 2017. However, it has no current,
unsecured finance lease in both the years. However, there is difference between the two types of leases in that it is
realised in the form of expense based on straight-line method over the term of the lease. In 2018, the commitments
of operating lease of Woolworths have been $22,904 million compared to $24,439 million in 2017. It has recognised
operating lease obligations for onerous lease in the balance sheet statement in “Note 3.9 of the latest annual report”.
In addition, the firm has lease commitments on its leased premises, which are calculated in the form of turnover
percentage of the store dwelling in the premises (Woolworthsgroup.com.au, 2018).
At present, Woolworths is following AASB 117 in order to prepare lease accounting, as the new standard
has additional cost, complexities and administrative abilities on the management in the absence of benefits.
Impact of the accounting rules of leases on Woolworths Group Limited:
The new lease standard, AASB 16 would affect the consolidated financial statements of Woolworths that
takes into account discontinued operations as well.