Impact of AASB 16 on Lease Companies

Accounting theory 1
Accounting theory and current issues
by Student Name
Class & Course
Professor
University
The City & State
Date

Accounting theory 2
Abstract
The new AASB 16 accounting for leases comes fully effective by January 1, 2020. The new
standard incorporated several changes to address the drawbacks that were experienced
under the AASB 117. This study sought to enlighten different users of financial statements
about the importance and impacts of AASB 16 on business operations. In tackling the topic,
the study focussed more on comparing AASB 16 and AASB 117. The findings show that
AASB 16 would not only improve the accuracy accounting information for lease companies
but also improve comparability to the information across different companies. Under the new
accounting for lease standards, both the finance and operating leases will be disclosed in the
balance sheet as either assets or liabilities. Such an action would lead to the reduction of
profitability level of lease companies. As a result, companies will choose to buy more assets
and lease a few after the standard becomes effective.
Table of Contents

Accounting theory 3
Abstract......................................................................................................................................2
1.0. Introduction.....................................................................................................................4
2.0. Comparative analysis of AASB 16 and AASB 117......................................................4
2.1. Evaluating the drawbacks of AASB 117: Accounting standard for lease......................4
2.2. The reason for changing the standard..........................................................................5
2.4. The impact of AASB 16 on companies that have significant levels of lease financing.7
a) The impact on shareholders..........................................................................................7
b) Book keeping complications..........................................................................................8
c) Timing............................................................................................................................8
2.5. Classifying most lease contracts as operating lease using the positive accounting
theory.......................................................................................................................................9
2.6. Implementation of AASB16 and comparability between lease asset companies.......10
2.7. The implementation of AASB 16 and its effect on the leasing market........................11
Summary/Conclusion.............................................................................................................11
List of references....................................................................................................................13

Accounting theory 4
1.0. Introduction
The new AASB 16 Accounting for Leases has introduced several changes. The purpose of
AASB 16 is to address the drawbacks that have been experienced under the AASB 117
Accounting for leases. The new accounting standards will impact the operations of entirely all
business entities. Lessees of assets are the most affected because they will be required to
comply with the new standards.
On the other hand, lessors are the least affected. Generally, AASB seeks to improve
transparency in the manner in which leasing companies operate. AASB came effective on
January 1, 2019, for companies that prepare their annual reports by December 31 annually.
Companies whose financial year-end by June 30 will start applying the standards from July 1,
2019. This paper enlightens different users of AASB principles about the importance and
impacts of AASB 16. The analysis focuses on comparing AASB 117 and AASB 16 to
understand the latter clearly.
2.0. Comparative analysis of AASB 16 and AASB 117
2.1. Evaluating the drawbacks of AASB 117: Accounting standard for lease
A significant disadvantage of AASB 117 is found under the classification of finance and
operating leases. While finance leases are represented as either asset or liability, operating
leases and off balance. The only disclosure of operating lease is made as lease payments
(expenses) in the profit and loss statement. However, some operating leases could not be
cancelled and required to be represented as either assert or liability. Preparers of books of
accounts took advantage of the accounting loophole to hide such liabilities from users of the
reports (Financial Accounting Standards Board, 2016, p. 79). Sometimes the information