IFRS 16 and Lease Accounting Impact

This assignment delves into the implications of International Financial Reporting Standard (IFRS) 16 on lease accounting. It examines how the standard enhances transparency by requiring the recognition of most leases on balance sheets, impacting financial reporting and analysis. The document further discusses the potential benefits and challenges of IFRS 16 implementation for both organizations and investors, considering factors like capital allocation, leasing strategies, and informed decision-making.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
Name of the university
Name of the student
Authors note

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Table of Contents
Assessment Task Part A:.................................................................................................................2
Requirement i).................................................................................................................................2
Requirement ii)................................................................................................................................2
Requirement iii)...............................................................................................................................2
Requirement iv)...............................................................................................................................3
Requirement v)................................................................................................................................3
Requirement vi)...............................................................................................................................4
Requirement vii)..............................................................................................................................4
Requirement viii).............................................................................................................................5
Assessment Task Part B:.................................................................................................................5
Requirement i).................................................................................................................................5
Requirement ii)................................................................................................................................6
Requirement iii)...............................................................................................................................7
Requirement iv)...............................................................................................................................7
Requirement v)................................................................................................................................8
References list:...............................................................................................................................10

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Assessment Task Part A:
Requirement i)
Credit Corp group has conducted impairment testing annually for goodwill and other
intangible assets. Recognition of provision of impairment is done as indicated by objective
evidence that impairment of trade receivables are done. Goodwill is tested for the impairment as
indicated by change in circumstances or events. Recognition of trade receivables are done at
fair value by deducting any amount of impairment loss attributable to that particular asset.
Moreover, impairment recognition is done as indicated by objective evidences of conducting
impairment of assets (Creditcorp.com.au 2017). In the current financial year, organization has
tested goodwill and other intangible assets for the purpose of impairment.
Requirement ii)
Allocation of goodwill is done to the municipal collections operating unit of the group
for the purpose of impairment testing. The lowest level with the group is represented by
operating unit at which the monitoring of goodwill is done for the purpose of internal
management. Assessment of impairment is done by group at least on annual basis. Recognition
of impairment loss is done when the carrying value of assets is more than their recoverable
amount. Assets recoverable amount is highest of the value in use or fair value minus cost to sell
(Creditcorp.com.au 2017).

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Requirement iii)
Credit Corp Group limited has not recorded any impairment expenses for the financial
year 2017 and 2016 respectively. The reason for organization not recording any impairment
expenses is that in the current financial year, there was no impairment of any relevant assets and
liabilities (Creditcorp.com.au 2017). However, only the impairment provision was made in
financial year 2017 in relation to the trade receivables.
Requirement iv)
When assessing the impairment of liabilities and assets, Credit Corp Group limited is
required to determine the carrying value of liabilities and assets. In determining the carrying
value, management of the group is required to make estimates and assumptions as they are not
readily available for other apparent sources. Estimation and assumptions are based on relevant
factors and historical experience. A reasonable expectation of future events is assumed for
determining estimated figures that are based on economic data and current trend both within the

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group and that are obtained externally. Underlying assumptions and estimates are reviewed on an
ongoing basis (Creditcorp.com.au 2017).
Requirement v)
Analysis of annual report of Credit Corp Group limited depicts that it has not adopted or
adhered to accounting standard AASB 136. As per the standard, an organization can incorporate
substantial amount of subjectivity in their procedure of impairment testing and enabling
managers to act opportunistically (Maynard 2017). It provides management with opportunities to
act at their discretion when testing assets for impairment. However, involvement of subjectivity
in the methodology will not provide users with appropriate input concerning impairment.
Evaluation of annual report of company concerning impairment testing depicts that management
might have incorporated some degree of subjectivity in their process of impairment testing.
Requirement vi)
After the evaluation of analysis of annual report of Credit Corp Group limited, it has
been ascertained that users of financial statement will not be able to gather much information
regarding impairment of assets. It was quite surprising to find that there was not detailed
presentation and disclosure of the assets that are impaired. Moreover, there was provision of only
impairment of trade receivables and no provisions made for any other assets.

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Requirement vii)
Evaluation of annual report of Credit Corp Group limited provides user with the
illustration that there were no different impairment testing procedures compared to other
companies. There were no new insights that are gained by users of the financial statements as the
information’s presented on impairment was limited. Moreover, notes to financial statement do
not make any disclosures about the impairment testing in detail and most of the information’s are
pertaining to impairment provision of trade receivables. Information has been presented in the
movement of impairment provision that depicts net changes in the impairment. Disclosures
regarding impairment of plant, equipment and property are related to total impairment losses that
are accumulated. All the estimates and assumptions regarding the impairment testing have not
elaborated and explained to provide user with clear insights (Creditcorp.com.au 2017). Users of
the financial statement of this particular organization will not be able to gain detailed insight into
the facts and figures of the impairment as it do not discloses much accurate and proper
information.

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Requirement viii)
Measurement of revenue is done at fair value along with cash and cash equivalents that
are subject to fair value risks. Customer value receivables, purchase debt ledgers, share based
payments, customer loan receivables, non derivative financial liabilities, all the non-monetary
items are intangible assets are measured at fair value. Fair value of financial liabilities and assets
that are recognized at fair value are subjected to currency exchange rate risks. It has been
ascertained that consolidated financial statements have not been prepared at fair value except for
employee remuneration costs that are determined at fair value in the form of equity settled
transactions at the date of making grant. Determination of such fair value is done by using
appropriate valuation model. Financial assets such as trade and other receivables are recognized
at fair value in the initial stage. Intangible assets are measured at the excess of cost of acquisition
over the net identifiable assets fair value (Creditcorp.com.au 2017).

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Assessment Task Part B:
Requirement i)
The former lease accounting standard makes it mandatory to classify the lease as either
operating lease or finance leases. Operating lease under IAS 17 is not required to disclose on the
statement of financial position rather they are treated as expenses and are mentioned in the notes
to financial statement. This enabled companies to keep their balance sheets at low level and
thereby distorting gearing and other key financial ratios and consequently transactions are not
represented faithfully. In actual terms, the lease commitments were considerably higher and that
was known to outsiders and users of financial statements as the liabilities were hidden.
Significance of missing information on the balance sheets varied by region, industry and between
companies (Lin and Graham 2017). It made it difficult for investors to make a comparison
between companies as true financial position was not reflected. From the source of secondary

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research, it has been ascertained that IASB has estimated that out of $3.3 million worth of lease
all over the world, only 25% is presented on the balance sheets (Mayo 2017). Therefore, users
and investors were not provided with economic reality.
Requirement ii)
One of the criticisms that are associated with IAS 17 is the off balance sheet financing as
the operating lease are presented off balance sheets and it was viewed as arguably most attractive
advantage of operating lease. Companies acquiring assets with debt financing leads to present it
on the balance sheets and the acquisition of assets via leasing does not obligate company to
present it as liability under former standard. However, they are treated as expenses and the rental
payment should be paid in future. Organizations classifying lease as operating lease takes
advantage in terms of depicting their overall liabilities lower than they actually have. This
system of off balance sheets liabilities does not only inflate their corporate earnings but also
misrepresent financial position. In order to maintain their debt covenants, companies are able to
satisfy their ratios and thereby reducing the covenants influence (Hussan and Sulaiman 2016).
This is so because companies in actual are not keeping their debt low rather they are
misrepresenting the overall debt they are carrying. This elaboration depicts the reason why the
debt presented on balance sheet is 66 times lower that off balance sheets.
Requirement iii)
Industries that use heavy equipments make use of operating leases mostly and airline
industry is the perfect example. The funding structure of airline companies differ considerably
from some carriers that finances aircraft through longer term lease and short-term lease and other
carriers purchasing the aircraft fleets. For investors, financial position of such companies might
appear different from those other companies in same industry. However, in reality, financial

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position of such companies might be same. It can be explained with the help of an instance,
Emirates airlines leases most of its aircraft fleets unlike its competitors such as German airline
Lufthansa that purchases most of its fleet. However, this difference in structure of funding might
make investors to seek difference between their financial positions but in reality their financial
position might be similar. The existing lease standard helps companies in masking their liabilities
as they had tied up in their renting as against financing lease (Henderson et al. 2015). Therefore,
under the former lease standard, there were no level playing fields between airline companies.
Requirement iv)
New lease standard IFRS 16 has the likelihood of impacting as many organizations as
possible mainly capital intensive industry such as shipping industry. This particular standard is
criticized for many reasons that are associated with change in accounting treatment and
administrative system. Some of the key financial ratios are likely to be adversely impacted;
however, it is believed by many companies that their financial position will not be less attractive.
It is perceived that the obligation of new standard to disclose operating lease on the balance sheet
will increase their balance sheets and overall structure of debts. Increased focus on operating
lease capitalization is not embraced by all organization as it would make their financial reporting
more complex (James 2016). Bank credits are associated with debt covenants that are related to
key financial ratios and the existing covenants seeks renegotiation under the new lease standard
(Weygandt et al. 2016). Organizations consider change in financial ratios to be of highly
important and it is suggested by findings that operating profits under new standard will be
worsen. Moreover, since all lease standard end up on balance sheet, it is expected that
administrative burden of companies will increase. Reporting entities will be keen to rely on
short-term lease with the implementation of this standard as it is perceived that such lease will

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not have considerable impact on the balance sheet. Furthermore, increased cost and complexities
of reporting followed by increased administrative burden is responsible for making IFRS 16
unpopular. Companies will be required to update their IT system, invest in educational efforts
and accounting system updating.
Requirement v)
The possibility of company to classify lease as operating leased and financing lease is
removed under the new lease standard IFRS 16. All the leases in future will be classified as
financing lease by companies that have the implication of recognizing them as liabilities and
assets on balance sheets. This will help in reducing the abuse of accounting rules and helps in
increasing comparability between companies. Purchasing of assets will become more common
with the implementation of new standard by companies. The biggest change will be the
transparent and enhanced visibility of actual amount of liabilities and assets on balance sheets
and investors and analysts will not be required to make any guesswork and make rough
calculations for comparing the companies and determining their actual financial position
(Warren 2016). Presentation of all the liabilities and assets in faithful form will facilitate better
and informed decision among investors (Lubbe et al. 2014). Management of organization will be
facing issues relating to administrative burden in the initial stage, however, with the time, IFRS
16 implementation will lead to allocation of capital in a better way and formation of leasing
strategies that will lead to a more balanced lease versus buy decisions.

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References list:
Cheng, J., 2015. Small and Medium Sized Entities Management’s Perspective on Principles-
Based Accounting Standards on Lease Accounting. Technology and Investment, 6(01), p.71.
Cortesi, A., Tettamanzi, P., Scaccabarozzi, U., Spertini, I. and Castoldi, S., 2015. Advanced
Financial Accounting: Financial Statement Analysis–Accounting Issues–Group Accounts. EGEA
spa.
Creditcorp.com.au. (2018). CreditCorp - How we work with you. [online] Available
at: https://www.creditcorp.com.au/customers/ [Accessed 26 Jan. 2018].
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Hussan, S.M. and Sulaiman, M., 2016. BETWEEN INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRSS) AND FINANCIAL ACCOUNTING STANDARDS
(FASS): THE DEBATE CONTINUES. International Journal of Economics, Management and
Accounting, 24(1), p.107
James, M.L., 2016. Accounting for Leases: A Case Exploring the Effect of the New Lease
Accounting Standard on the Financial Statements. Journal of the International Academy for Case
Studies, 22(3), p.152.
Lin, K.C. and Graham, R.C., 2017. How Will the New Lease Accounting Standard Affect the
Relevance of Lease Asset Accounting?.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial Accounting GAAP Principles. OUP
Catalogue.

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May, R.A., 2017. An Investigation of Financial Accounting Statements and Reporting
Techniques (Doctoral dissertation, University of Mississippi).
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.
Mayo, W., 2017. GAAP: An Analytical Study of Financial Accounting Standards (Doctoral
dissertation, University of Mississippi).
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.
Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.
Warren, C.M., 2016. The impact of International Accounting Standards Board
(IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3).
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & Managerial Accounting. John
Wiley & Sons.