AASB 16: Impact on Lease Accounting and Financial Reporting

Accounting Theory and Contemporary
Issue
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Abstract
This article emphasized on the ensuing issue of AASB 16 to be effective from 1st
January, 2019 in perspective of its old version AASB 117- Leases. The article critically
analyzed the aspects of old AASB standard 117 and the drawbacks of this standard to
replace it with the new version AASB 16. As this standard is related to leases, which is
essential ingredient for any business, accounting standard is required to regulate the
operation of it with its proper presentation in financial reporting. The role of financial
reporting standard through IFRS 16 is prescribed by IASB for generalized presentation
of financial information related to AASB 16. This discussion includes a comparative
analysis of both the standards AASB 117 and AASB 16 with a practical presentation of
financial reporting of any ASX- listed company in respect of required disclosures in their
annual financial report.
Key Words: AASB 117, AASB 16, IFRS 16, Transition, Finance Lease, Operating Lease
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Table of Contents
Introduction................................................................................................................... 4
Discussion.................................................................................................................... 4
AASB 117- Critical analysis and drawback.....................................................................4
Necessity for change................................................................................................... 5
Changes incorporated in AASB 16................................................................................5
Impact of AASB 16 on the companies with lease financing...............................................6
Inclination to operating lease by companies- AASB 117...................................................8
Comparison of lessee and lessor as per IFRS 16............................................................9
Explanation of procurement of new assets-post AASB 16.................................................9
Disclosure of Lease accounting in Annual report 2018- Telstra(ASX Code TLS)..................9
Conclusion.................................................................................................................. 10
References:.............................................................................................................. 12
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Introduction
AASB 117 was effective since 1st July 2007 by AASB for leases accounting and its
financial presentation in the annual accounting report. This standard was initiated with
the objective of accounting treatment for Leases. Due to its drawbacks regarding
treatment of different types of leases and subsequent loopholes related to its application
of finance and operating leases, the need of new standard was evolved. This situation
led to requirement of amended standard with the assurance of standardized system for
accounting of Leases with more prudent and professional approach. The main objective
of setting accounting standard by regulator is to provide proper treatment of financial
instruments to project financial report more transparent for the stakeholders. The
objective of this article is to provide the discussion about both the standards- the
erstwhile standard AASB 117 and upcoming AASB 16. Main focal points of this
discussion are the features of AASB 117 and its drawbacks, the need for change of this
standard, the application of AASB 16, comparison between the features of both these
standards and exemplification of the application of both these standards in corporate
accounting with the case study of one ASX listed company- Telstra, which has the
business operation with the feature of leases by comparison of exercised standard and
the would-be exercised standard for this accounting issues. Main objective of the
amendment is to ensure proper application of accounting system for the financial
instrument- Leases, to be followed by the corporate. This article will conclude with the
future impact of upcoming standard AASB 16 with its positive features to ensure
prudence and professional presentation of financial accounting for the stakeholders to
make them comfortable and satisfied with the annual financial report for their
subsequent justified decision.
Discussion
AASB 117- Critical analysis and drawback
AASB 117 is inspired by IAS 17 and is insisting on financial treatment and reporting
about the financial instrument-Leases. This standard was effective from 1st July, 2007
for incorporation in accounting reports of business entities involved in leases
transactions. Main interpretation of this standard is to distinguish between operating and
finance leases. The basis of this comparison is on the view point of operating and
finance lease and its subsequent impact on risks faced and rewards achieved, which
are incidental to the proprietorship of any leased assets owned by lessee or lessor. The
identification of finance leases are done when the leases transfer the rewards and risks
to the ownership flowed from lessor to lessee. The identification of operating lease is
made when the rewards or risks of the lease is not transferred from lessor to lessee with
substantial effect. This standard demands that in case of an operating lease, the
payment of lease is to be recognized as the nature of expense on the basis of straight-
line calculation; if any other suitable basis found more authentic as per the time frame of
the user’s gain. Normal business practice endorses the lease concept for one or more
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