Accounting Theories

This report provides information about the AASB 16 lease accounting standards and its impact on financial reporting. It discusses the reasons for the change, drawbacks of previous standards, and the difference between old and new standards. The report also includes a case study on the lease accounting activities of Coca Cola Amatil.

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Accounting Theories 1
Executive Summary
The report enlightened the reader about the information about the AASB 16 lease accounting
standards present in the environment. The AASB 16 standard replaced the IAS 17 standard so as
to initiate effectiveness in the financial reporting of the companies. Initially IFRS 16 standard
was introduced in the environment that developed the recording of operating and finance lease in
the system so as to avoid the elimination of liability from the books. This standard was further
adopted by AASB. Further, the below mentioned report refers to the reasons for change in the
standard along with the drawbacks in previous standards and the difference between new and old
standards. More details about the lease accounting theory is discussed below:

Accounting Theories 2
Contents
Introduction......................................................................................................................................2
Lease Financing AASB 16..............................................................................................................2
Drawbacks in Previous Lease Standards.........................................................................................4
Reason for Changes.........................................................................................................................6
Difference between Old and New Accounting Standards...............................................................7
Accounting for Lease of Coca Cola Amatil....................................................................................8
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

Accounting Theories 3
Introduction
The objective of this report is to guide the reader regarding the information of the accounting for
lease strategies present in the environment. The AASB 16 standard elaborates about the leasing
rules and guidelines for the organizations present in the external environment. The Australian
Accounting Standards Board is an Australian Government agency that develops and maintains
financial standards and applies it the organizations despite of the fact that it is private and public
sector companies present in Australian economy (AASB 2015). The below mentioned paper
highlight information about the lease financing guidelines about AASB 16. It evaluates about the
drawbacks in the previous lease standards along with the reasons to implement the new AASB
16 lease standards in the environment. The latter part of the report also elaborates lease
accounting activities of ASX listed Coca Cola Amatil company. The company is a well reputed
organization that operates its business functions in the worldwide market. The AASB 16
standard came into existence from 31 December 2019 and changed the majority of lease
accounting initiated by the companies. More details about the paper are discussed below:
Lease Financing AASB 16
Australian Accounting Standard Board (AASB) is an Australian Governmental Agency that
creates and maintains the rules related to Australian financial reporting standards. This rules
created by this agency applies on both public and private sector. The aim of the AASB to create
such rules is to protect the interest of the customers in the environment and develop a framework
at the same time to help the businesses function effectively. AASB 16 is a standard formed by
the AASB only with an aim to increase the effectiveness of the organizations and protect the
interest of the investors as well. The AASB 16 elaborates about the lease accounting present
under the section 334 of the Corporations Act 2001 (Davern, Gyles, Potter, and Yang 2019).
The aim of this standard is to outlay the rules of recognition, measurement, presentation and
disclosure of the leases for the companies in the business environment. This standard aims to
ensure that the lessees and lessors provide adequate information in the financial reports of the
company in such a way that it positively represents the lease transactions initiated in the business
environment. This standard provides adequate information of the user’s financial statement and

Accounting Theories 4
evaluates the impact of lease on the financial performance and the cash flow of an entity as well.
It should be noted that it is important to perpetually consider the standard and apply it in the
business so as to provide effective results to the investors in the business environment (Chatfield,
Chatfield, and Poon 2017).
Talking about the scope of this lease standard, it should be noted that an organization should use
this lease standard to all the leases, including the leases of right use of asset in a sublease expect
for a few cases. These cases are mentioned below:
i. Lease to biological assets that are covered within the scope of AASB 141 Agriculture
held by a lessee
ii. Leases to discover for the use natural gas, mineral oil and other non-regenerative
resources
iii. Rights that are held by the lessee in the licensing agreement and are covered under AASB
138 Intangible Assets for items like manuscripts, picture films, patents and copyrights
iv. License of intellectual property provided by the lessor that are covered under the scope of
AASB 15 Revenue from the Contracts with the customers (Hladika, and Valenta 2018)
v. service concession arrangements covered under the Interpretation 12 Service Concession
Arrangements
It should be noted that a lessee may but is not required to use under the AASB 16 standards for
the lease of intangible assets other than those that are described in the statement (iii).
Further, it should be noted that in order to apply for this standard it is important to identify the
lease in an appropriate way. An organization should assess that whether the contract includes
lease or not. If the contract shows a particular time period and right to control the identified asset

Accounting Theories 5
then it means that it contains lease which shall apply the AASB 16 standard (Choubey 2016).
Furthermore, it should also be noted that AASB 16 on leases fundamentally changes the ways in
which financial reporting process is conducted by the companies in the business environment.
According to this process, the lessees need to change their ways of accounting for the operating
leases in the business environment. This new standard eliminates the operating leases
classification and makes all the lease liability visible in financial reporting of the lessees along
with the corresponding right of use for all the leases with presence of few exceptions. According
to this process, the organizations need to find out the actions that they need to implement in order
to prepare the financial statement by using the new accounting standards. The change with the
implementation of AASB 16 can be complex on firms and possess effect beyond the accounting
treatment of the company as it can affect the interest of the investors in the business
environment. This type of reporting will show effect on the performance of the business, so it
important for the management to not only considers the commercial and practical use but also
the implication of tax as well (James 2016).
Drawbacks in Previous Lease Standards
The IAS 17 lease standard deals with the accounting and financial reporting of the lease
transactions in the business environment. Initially the companies used to hide the financial lease
liability in the environment and used to reflect all the lease payments directly to the profit and
loss when paid. Resulting in which, the investors were unable to analyse the real position of the
company in the target market. Further according to IAS 17, there were two types of lease, a
financial lease and an operating lease. A financial lease is one of the leases that transfer the risks
and rewards that are incidental to the ownership of the asset. The legal title of the asset may or
may not be eventually transferred. Further, an operating lease is a lease that holds characteristics
opposite to finance lease. The fact should be noted that as such there were no failures or
drawbacks in accounting lease process however, the AASB 16 standards overruled it by
presenting all the lease related information on the financial statements of the company (Edeigba,
and Amenkhienan 2017).
The IAS 17 standards do not cover the entire information about the lease accounting due to
which the companies gain the advantage to find out the loopholes in the process and do not

Accounting Theories 6
record the lease liability in their books of accounts. The entities used initiate the off balance
sheet financing transaction using the IAS 17 standard. This standard never took the operating
lease activities into accounts due to which neither asset nor liability was represented in the
balance sheet (Öztürk, and Serçemeli 2016). Thus, it can be said that through this type of
activity, the organizations gained the advantage to tamper the books of account and show a
positive image to the investors in the business environment. The hidden liability was not
presented on any head of the balance sheet only few notes disclosed the facts. But no person
looks at the notes with concentration due to which it can be said that tampering activity was
implemented by entities. According to this process, straight line basis was used to eliminate the
confusion and record the lease accounting process in the organization (Xu, W., Davidson, and
Cheong 2017).
This straight line process helped the entities to hide the liabilities under the name of operating
lease. Through the straight line process, the organization gets the advantage to do not record
various variable changes occurring within time and analyse the total liability only. It should be
noted that although this type of process makes various things simpler for the businesses but at the
same time it also fails to record various transactions as well. The finance lease is appropriately
calculated according to this process but the operating lease is the aspect where the companies
find loopholes to present the financial statement positively and eliminate the liabilities (Sacarin
2017). Further, it should be noted that according to SIC 15 operating lease, the incentive clarifies
that the rent free period should be seen as a reduction in the rental income and the expenses by
the lessor and the lessee over the lease term.
Further SIC 27 suggested that the evaluation of substance of transactions involving the legal
form of lease form of lease clarifies that the transactions that include the legal form of lease
should be included for one single transaction in case the economic effect is understood with
reference to all the transactions (Giner, Merello, and Pardo 2018).
Reason for Changes
The fact should be noted that the business environment gained the need to implement the AASB
16 standards in the business environment so as to eliminate the occurring of fraudulent activities.
This standard provides an identified implementation process to eliminate the hiding of various

Accounting Theories 7
lease transactions in the external environment. Initially this process identifies all the contracts
that represent in lease arrangement in an organization. Further, this process determines that
which contract meets the need and definition of a lease in the business environment according to
the AASB 16 standards. After analysing the lease present with the company, the management of
the company should determine that whether the low value lease or the short term lease
exemption is to be applied on such lease or not (Giner, and Pardo 2018).
After going through the exemption case, the business then need to determine that which
transition approach is to be used in accounting of the lease. Lastly, the business need to identify
the lease liability and the right of used assets in the business environment. Implementation of this
type standard provides advantage to involve the judgement and make various choices and decide
the transition route as well. Through this process, the entities can effectively include all the
financial transactions of the business. There is a need of new AASB 16 standards in the business
environment so as to eliminate the off balance sheet accounting activities for lease and redefine
the commonly used financial metrics like gearing ratio and EBITDA (Kabir, and Rahman 2018).
This type of standard will increase the comparability and provide true records of the financial
position of the organization. This type of standards is required to create authenticity and
effectiveness of the business model of the companies. Implementation of such standards in the
business accelerates the existing market development in leasing and improves the focus on
service rather than physical assets. Such standards are required in the business to create a far
reaching impact on the lessee’s business process and control system. Through this process a
cross functional approach is conducted in the business for the purpose of implementation rather
than just accounting process. Further, it should be noted that under the IAS 17 lease accounting
system, the bright lines practices was implemented by the business due to which no efficient
information was recognized in the balance. Resulting in which, all the other information of the
company was also tampered that affected the decision making process of the investors (Zamora-
Ramírez, and Morales-Díaz 2018).
Difference between Old and New Accounting Standards
The fact should be noted that there are various differentiations in the IAS 17 and AASB 16
standards that are mentioned below:

Accounting Theories 8
 Disclosure
IAS 17 – Disclosure spread the particular necessity of finance leases different from operating
leases.
IFRS 16 – Disclosure get rid of the different introduction of finance and operating leases for
lessees and rather requires divulgences of the privilege of resources and liabilities. There is
likewise extra exposure to explicitly state that whether the lessee has selected not to apply for the
IFRS 16 to short term and low-value leases. In particular, disclosure is required for short term
and low-value rent express if these decisions have been made (Morales-Díaz, and Zamora-
Ramírez 2018).
 Estimating PV and rate
IAS 17 –finance leased resources and liabilities are estimated at the fair value of rented property
or, in case bring down to the PV of the base lease payment. The discount rate is to be utilized in
analysing the PV of the minimum lease payment is the certain rate whenever known, something
else, the tenant's rate of borrowing. Any direct expenses of the lessee are included to the
estimation of benefit (Warren 2016).
IFRS 16 – Measures the liabilities of lease at the present value of the rent payment of asset that is
not paid at the time of discount while utilizing the certain rate known by the organization. There
is no relation to an adequate value and the estimation does not identify with the negligible rent
instalments. Rather, the lease payment that is not paid (Sari, Altintas, and Taş 2016).
 Definition of Lease
IAS 17 – concentrate on whether the lessee or lessor conveys risks and reward. Together rent and
non-rent segments are accounted out of balance sheet.
IFRS 16 – More focus on who monitor the ROU asset, connecting with IFRS 15. Non-lease
segments still does not includes in this standard, yet lease parts should be accounted in it.
Difference: Another adjustment in lease arrangement influences that what actually comprises a
lease understanding as IFRS 16 includes another definition of lease in the business environment.
The real meaning of the definition of lease in IFRS 16 does not change a lot from the IAS 17

Accounting Theories 9
one. Be that as it may, there is a more noteworthy to analyse that how lease differs from an
administration service. This is gone for improving the equivalence of fiscal summaries of
account, catching helpful material data on leases as opposed (Dakis 2016).
Accounting for Lease of Coca Cola Amatil
The fact should be noted that the company Coca Cola Amatil significantly make use of the new
AASB 16 standards to initiate the lease accounting for the business. The company has revised
the calculation of their lease accounting so as to align it with the new functions of AASB 16
along with AASB 117 that identifies the certain lease contracts in the business environment.
Such changes resulted in the decrease of the comparative amount of the total disclosure of the
income. The company has further also entered in the non-cancellation operating lease agreement
on certain properties, plan and equipments along with motor vehicles. The lease agreement on
such assets differentiates on the basis of their length and the assets involved. Under this case, the
business the business has started recognizing the right use of assets and liability attracted to the
company in the business environment (Brumm, and Liu 2019). The current expenses within the
EBIT will be changed by the straight line method of depreciation of the right use of assets and it
will also eliminate the lease liability as well. The company implemented a project based on the
new lease accounting system present in the business environment. The internal consultations
with treasury and tax groups have showed no significant issues in relation to this standard in
relation to the Group’s funding, dividend obligations and tax (Joubert, Garvie, and Parle 2017).
Lastly, focus should be made on the aspect that the business will make use of the new standards
to implement a modified approach that requires no restatement of the comparative information.
The company has aimed to make all the lease except operating lease, equal to the opening lease
liability. It should also be noted that the company also stated that the have effectively
implemented the new AASB 16 lease standards to calculate the lease that affect the EBITDA of
the company in a substantial manner. Disclosure regarding all the information of lease
accounting has been made by the company Coca Cola Amatil. The group 13 largest property
lease of the organization was disclosed on the present value of committed lease payment since
the commencement of the new AASB 16 standard in the business environment (Coca Cola
Amatil 2018).

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Conclusion
Thus, concluding the report mentioned above, the focus should be made on the information about
the newly invented AASB 16 standard based on lease accounting. The paper evaluated the
functions of new AASB 16 standards that implemented in the business environment. The AASB
16 standards are derived from the IFRS 16 standards and replaced the IAS 17 standards that also
elaborated about lease accounting. Further, it should be noted that limitations, differences and the
need to implement the new accounting standards are also identified in the paper. The fact should
be noted that the previous accounting standards, did not had efficient system to record all the
finance as well as operating lease activities in the environment due to which the need for new
lease accounting system emerged. It should also be noted that the lease accounting activities of
the company Coca Cola Amatil has been highlighted in the paper to elaborate the
implementation of the AASB 16 process in the business environment.

Accounting Theories 11
References
AASB, C.A.S., 2015. Investment property.
Brumm, L. and Liu, J., 2019. New leasing accounting standard. Taxation in Australia, 53(8),
p.449.
Chatfield, H.K., Chatfield, R.E. and Poon, P., 2017. Is the Hospitality Industry Ready for the
New Lease Accounting Standards?. The Journal of Hospitality Financial Management, 25(2),
pp.101-111.
Choubey, S., 2016. IFRS 16 Leases. The Management Accountant Journal, 51(2), pp.91-94.
Coca Cola Amatil., (2018) Annual Report 2018 [online]. Retrieved from <
https://www.ccamatil.com/-/media/Cca/Corporate/Files/Annual-Reports/2019/2018-Annual-
Report.ashx> [Accessed on 25 May 2019].
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
Davern, M., Gyles, N., Potter, B. and Yang, V., 2019. Implementing AASB 15 Revenue from
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de Albuquerque, F.H.F., Marcelino, M.M., Rodrigues, N.M.B. and de Almeida Cariano, A.J.R.,
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Edeigba, J. and Amenkhienan, F., 2017. The Influence of IFRS Adoption on Corporate
Transparency and Accountability: Evidence from New Zealand. Australasian Accounting,
Business and Finance Journal, 11(3), pp.3-19.
Giner, B. and Pardo, F., 2018. The Value Relevance of Operating Lease Liabilities: Economic
Effects of IFRS 16. Australian Accounting Review, 28(4), pp.496-511.

Accounting Theories 12
Giner, B., Merello, P. and Pardo, F., 2018. Assessing the impact of operating lease capitalization
with dynamic Monte Carlo simulation. Journal of Business Research.
Hladika, M. and Valenta, I., 2018. Analysis of the effects of applying the new IFRS 16 Leases on
the financial statements. Economic and Social Development: Book of Proceedings, pp.255-263.
James, M.L., 2016. Accounting For Leases: A Case Exploring The Effect Of The New Lease
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Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
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Kabir, H. and Rahman, A., 2018. How Does the IASB Use the Conceptual Framework in
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Zamora-Ramírez, C. and Morales-Díaz, J., 2018. Effects of IFRS 16 on Key Financial Ratios of
Spanish Companies. Estudios de Economía Aplicada, 36(2), pp.385-406.