IFRS 16 Lease Accounting Standard Impact

This assignment delves into the implications of the International Financial Reporting Standard (IFRS) 16 on lease accounting. It examines the shift from operating leases to finance leases, analyzing how this impacts financial statements, particularly regarding assets and liabilities. The discussion also covers the potential for a more level playing field between companies utilizing different leasing strategies. Further, it explores the challenges associated with implementing IFRS 16, including its impact on listed companies, investor decisions, and the overall adoption rate.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance financial accounting
Name of the student
Name of the university
Author note

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Table of Contents
Task A........................................................................................................................................2
Answer (i)...................................................................................................................................2
Answer (ii).................................................................................................................................2
Answer (iii)................................................................................................................................3
Answer (iv).................................................................................................................................3
Answer (v)..................................................................................................................................3
Answer (vi).................................................................................................................................3
Answer (vii)...............................................................................................................................4
Answer (viii)..............................................................................................................................4
Task B........................................................................................................................................5
Answer (i)...................................................................................................................................5
Answer (ii).................................................................................................................................5
Answer (iii)................................................................................................................................5
Answer (iv).................................................................................................................................6
Answer (v)..................................................................................................................................6
Reference....................................................................................................................................7

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Task A
Answer (i)
The various tangible as well as intangible assets were considered for the purpose of
carrying out the impairment test by Data3 Limited (Data3 2018). The intangible assets were –
 Goodwill
 Software assets
 Customer relationship
The tangible assets considered for impairment test are –
 Leasehold improvements
 Equipment (Sooriyakumaran and Thirunavukkarasu 2013)
The intangible asset like goodwill are not amortised but considered for the purpose of
impairment test annually or more often if any indication exists that the asset may get
impaired.
Answer (ii)
For conducting the impairment test at the end of each period the company checks
whether any indication is there for impairment. If any indication is there, the company
measures the recoverable amount of that asset. Further, if the recoverable amount for any
asset is not able to be determined or cannot be measured then the asset’s cash generating
unit’s value is determined (Picker et al. 2016).

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Answer (iii)
For the accounting year ended 2017, the company recognised $ 283,000 as
impairment loss as compared to $ 232,000 for the previous year.
Answer (iv)
For calculating the fair value, the discount rate is estimated on weighted average cost
of the capital on the date of impairment test (Data3 2018). Further, the recoverable amount is
measured by the market condition on the date of impairment test. If the asset value is not
determinable from the active market, then valuation technique is used for computing the
value.
Answer (v)
IAS 36 for Impairment of asset allows the user to apply the creativity and
imagination. Therefore, the management can carry out the test at their own discretion as
there is a condition that the intangible assets can be considered for test when any indication of
impairment is there. Therefore, the test can be carried out during the economic downturn to
record more loss in the income statement (Generalova 2014). Therefore, the subjectivity is
involved in conducting the impairment test of the intangible assets.
Answer (vi)
The most confusing part regarding impairment test is the indication of impairment.
The management can identify the indication through the specified external and internal
indication and apply their knowledge and experience for finally considering the asset for
impairment (Guthrie and Pang 2013). Thus, the most difficult part is the time duration in
which the test is to be carried out and the indication based on which the asset shall be
considered for impairment test.

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Answer (vii)
New insights gained with regard to impairment test are the measurement of fair value
and measurement of value in use. If the fair value of the asset is not determinable from the
active market fair value of the asset’s CGU is determined.
Answer (viii)
Valuation techniques are used for determining the fair value. Various valuation
techniques are present of the similar assets, arm length price of asset and projected future
cash flow using proper discounting rate. As per IFRS 13, the fair value is measured through –
 Value as per sales agreement (Capalbo 2013).
 Asset’s value under active market
 Value based on best available information

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Task B
Answer (i)
Before the introduction of new lease standard, the leases were differentiated as
finance lease and operating lease. Further, the operating leases were not recorded by the
companies under the balance sheet and were treated as the off-balance sheet item (M2.com.au
2018). Companies that follow the IFRS or the US GAAP had approximately 3.3 trillion of
assets under lease and out of this 85% of the companies treat the leases under operating lease
and therefore do not account the same under balance sheet. Thus, the balance sheet of the
company does not reveal actual financial status which, in turn hide the actual economic status
Answer (ii)
Under the former lease standard almost 50% of the companies recorded 85% of their
assets as off-balance sheet items. Owing to this, the balance sheet reveals much lower amount
of lease liabilities whereas in actual the amount of liabilities were much more. Further, during
the economic downturn, the companies were not able to cope up with the actual changes and
became insolvent. Therefore, the off-balance sheet liabilities were 66 times more as
compared to the balance sheet obligations.
Answer (iii)
Most of the companies, particularly the airline companies used to treat the leases as
off-balance sheet items as the leases were treated as operating. Therefore, there was a
difference of results among the companies who purchases their fleets and the companies who
leases their fleets. Further, as the balance sheet does not reflect the actual financial picture,
most of the investors who just look into the financial statement for assets and liability

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evaluation will definitely be misguided. Therefore, there is no existence of level playing field
between the airline organizations under the previous lease standard.
Answer (iv)
It is expected that the new standard will have impact on almost 1 out of 2 listed
companies and is not expected to get popularity to all the companies. Further, anything new
is assumed as controversial and not easy to adopt by the companies. Moreover, all the
departments including the IT, HR department, finance department shall be ready to comply
with the new standard. Therefore, it is not expected to get popularity with all the
organizations.
Answer (v)
As under the former standard the financial statements are misstated, the investors who
analyse the financial statement will be misguided. There are very few investors who will go
through the notes and every other information to analyse the financial position. However, the
new standard is expected to amend IFRS 16 and provide better information to the investor as
the liabilities will be presented properly (Ifrs.org 2018). Therefore, the new standard will
provide the investors with better decision making information.

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Reference
Capalbo, F., 2013. Impairment of Assets.
Data3., 2018. Cloud Solutions & ICT Service Providers Australia | Data#3. [online]
Available at: https://www.data3.com/ [Accessed 14 Jan. 2018].
Generalova, N.V., 2014. Sokolova NA Uchet obestseneniya. aktivov. na. primere.
obestseneniya. gudvilla. kak. oblast’primeneniya professional’nogo suzhdeniya [Accounting.
of. impairment. of. assets. as. the. case. of. goodwill impairment as the field of professional
judgment application]. Mezhdunarodnyi bukhgalterskii uchet–. International accounting,
(26), pp.2-14.
Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from
2005–2010. Australian Accounting Review, 23(3), pp.216-231.
Ifrs.org., 2018. IFRS. [online] Available at: http://www.ifrs.org/ [Accessed 14 Jan. 2018].
M2.com.au., 2018. [online] Available at: http://m2.com.au/investor-centre/reports-
presentations-and-resources/annual-reports/ [Accessed 14 Jan. 2018].
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L.,
2016. Applying international financial reporting standards. John Wiley & Sons.
Sooriyakumaran, L. and Thirunavukkarasu, V., 2013. Disclosures and impacts of impairment
of non-current assets in the financial statements: A study on listed manufacturing companies
in Colombo Stock Exchange (CSE) in Sri Lanka.