Advanced Financial Accounting: A Case Study on A2 Milk Company

This report discusses the accounting concept of A2 Milk Company, the incorporation of new accounting policies for lease AASB 16, and the disclosure related to lease on the company accounting policies by effect of AASB 16 from AASB 117.

ADVANCED FINANCIAL ACCOUNTING
Topic: Advanced Financial Accounting
Name of the Student:
Name of the University:
Author Note:

ADVANCED FINANCIAL ACCOUNTING
EXECUTIVE SUMMARY
This report states about the accounting concept of A2 Milk Company by its financial report of
2017-2018. After this, it includes the answer to the relevant question as first question discussed
about the accounting concept practices in A2 Milk Company. The second answer discusses about
incorporation of new accounting policies for lease AASB 16. And the last answer acknowledges
the discloser, related to lease on the company accounting policies by effect of AASB 16 from
AASB 117. After this it include the conclusion based upon the entire report.

ADVANCED FINANCIAL ACCOUNTING
Table of Contents
INTRODUCTION...........................................................................................................................3
DISCUSSION..................................................................................................................................4
Answer to Q.1..............................................................................................................................4
Answer to Q.2..............................................................................................................................6
Answer to Q.3..............................................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCE LIST.......................................................................................................................11

ADVANCED FINANCIAL ACCOUNTING
INTRODUCTION
Advance Financial Accounting is concept which includes different events which take place in a
company like merger and acquisition, operation related to foreign currency, change in financial
statement, etc. As this report is based on advanced financial accounting of A2 milk Company in
which it discuss about the issue related to lease under Australian Accounting Standard Board and
effect of AASB 16 from AASB 17(Jones and Higgins 2016). A2 milk Company is a milk
producing company and their products are been sold in different super markets of Australia, New
Zealand, China, UK and USA. A2 milk Company which operates globally in food and beverage
industry. It is listed in Australian Securities Exchange from April 2015. As per the company
financial report of 2017-2018 its showed a revenue of $900 million, EBITDA is around $280
million, profit after tax of $195 million approx., basic earnings per share is 27.0 cents and have
around 10,950 stores in china and 6,050 stores in U.S . As for the company 2017-2018 was very
important year, accounting for the lease have changed from AASB 117 to AASB 16. As there is
very tight facing profit margin for the company in dairy industry so the A2 milk company
farmers and creditors both need to aware and keep update in the change of finance line in the
market. In coming time farmer of A2 Milk Company will be facing problem in funding as due to
high competition. The farmer have to pay high price premium for the funding which is one of the
risk factor for the company. And thus farmer need to analyses the business better to make
efficient decision.

ADVANCED FINANCIAL ACCOUNTING
DISCUSSION
Answer to Q.1
Accounting Concept refer to recording of accounts and business transaction on an assumption of
rules and principle based on the following standards. Basically accounting concept consist of
conservatism, consistency, full discloser and materiality. A2 Milk Company is incorporated and
formed in New Zealand though it operates globally and also registered as company incorporating
in another country in Australia under the corporation act 2001. The consolidated financial report
of 2017-2018 is prepared as per the GAAP in New Zealand, it follows with International
Financial Reporting Standard. Its financial statement are prepared accordance to historical cost
excluding the listed investment, it does not consider the fair value or money value of assets.
Accounting Policy related to the foreign currency:
At initial stage the foreign currency transaction are translated to the functional currency at the
rate of exchange according to the date of the transaction. Income / loss generated from foreign
exchange differences comes under the head of comprehensive income. As per the New Zealand
IFRS requirement, the preparation of financial statement is judged, estimated and assumed by the
company’s management. All estimates and followed assumption are reviewed on an ongoing
concern (Psaros and Trotman 2014). Accounting estimates are revised in period of their
occurrence and in any future period affected. Information related to some uncertainty event in
applying the accounting policies which have significant impact on the financial statement given
in following notes: In case of Deferred tax assets- recovery of deferred tax assets, Inventories-
Estimation of Net realizable value. A2 Milk Company have adopted NZ IFRS 9 which contain 3
principle for financial assets are: amortized costing, fair value from profit and loss and fair value

ADVANCED FINANCIAL ACCOUNTING
through other comprehensive income (Tănase, Calotă and Oncioiu 2018). Under the IFRS 9 the
assets are managed as per the business model and company’s financial liabilities are measured
under the amortized cost. Compare to NZ IAS 39 credit losses are recognized earlier in under NZ
IFRS 9. Under the IFRS 9 the changes occurrence of accepting new policies are applied in
retrospectively. As per the new standard there is no changes in measurement of short term
deposits and cash, trade and other receivable, other than this the company have no other assets
and liabilities in prior period, requiring transition treatment consideration. As per NZ IFRS 15 it
changed the way of recognition of revenue treatment. A2 Milk Company follows three operation
segment: The Australia and New Zealand areas receives revenue from the formula of dairy
product with the side income of royalty and license charge income. The segment of China and
New Zealand received the revenue from export of its formula and products. And the U.K and
USA segment receive revenue from sale of formula and dairy products. A2 Milk Company
recognize the revenue at the fair value of the receivable consideration. There is provision of
deferred tax assets for the unused tax losses and tax credit that future tax gain will be available
against which can be used. Though there is requirement of judgment in deferred tax assets at
each date of reporting. Assumption by the management estimating the future cash flow will
affect the deferred tax assets. Change in estimating the future performance of the business will
impact in recovering the deferred tax assets. At initial stage the trade and other payable are taken
as fair value, by use of effective interest rate. This represent the liabilities for the company as
there will occurrence of payment in future resulting from the purchase of goods. This amount are
unsecure in nature (Öztürk and Serçemeli 2016). There is payment to the employee to give
benefit in respect to wages and salaries. Though there is provision made for the employment

ADVANCED FINANCIAL ACCOUNTING
which is to settlement within 12 month at the nominal values by considering the remuneration
rate which is applies at the time of settlement.
Answer to Q.2
The new accounting standard on lease is an important concept as it bring a imporatant changes
on the financial statement of the A2 milk company. AASB have come up with lot of changes
related to accounting on lease, as it bring change of removal of headline of the differing between
operating and financial lease for lessees as now leases are been shown in balance sheet. Now
AASB 16 have as significant impact on the A2 milk company which was not use of be before.
As AASB 16 is impacting all type of entities as new standard is proactive and it is to be
mandatory prepared. As before this new standard, there used to be an obligation to make future
payment as there was not any rule in balance sheet of showing the operating lease agreement
even if there is future expenditure for the company (De Villiers and Middelberg 2018). And one
of the problem with this that it does not provide the actual financial position of the company
which use to be big concern for the stakeholders. It is be notes that the latest standard changes
going to be applicable from 1st January, 2019. After such there will be mandatory for the A2 milk
company to show the lease liability and mandatory of use an asset on balance sheet. In simple
words after such new standard the company have to include the cost on leased asset and benefit
relating to it on its balance sheet. No doubt the new standard will provide stakeholders true and
fair view of financial position of the company by stating all the liabilities and important
information in their financial reporting which will help stakeholders to take an economic
decision, but still new standard have negative side too. As this new standard will make company
position more transparent which will eventually increase the financial reporting risk by making

ADVANCED FINANCIAL ACCOUNTING
more complexity and arose of other hidden issue of the company to its users. As initially the
new changes will differ the profile of expense (Svoboda and Bohušová 2017). In spite of being
the straight line rental expense, as this will going to be less expenses compare to before when the
expenses were more which will impact the expense profile (Potter 2015). It will simply raise the
metrics like EBIDTA compare to operating rental expense, below the EBIDTA line there will be
a movement of expense which is related to the different issues. As different anomalies related to
the possible financial reporting, using of the asset will be non-current whereas liability related to
the lease will be split between the current and non-current (Morales and Zamora 2018). This
difference will create a serious issue with working capital with partly current liabilities as this
funding to the non-current asset. This will simply impact the bank stakeholders which can lead to
breaches if A2 Milk Company is not a proactive taking to their financiers. Another impact by
implementing this new standard is that company will be now show the use of the assets on its
balance sheet which lead to increase the total assets and there will be mandatory of auditing the
financial statement. But at initial stage this new changes will bring confusion to the stakeholders
for which there will be an opportunities for the companies who can make understand the benefit
of it’s to investors, financiers and shareholders (Baker etal. 2015). So after implementation of
this new standard this will be much requirement for the business who are starting with lease
contract to mandatory follow all rules and regulation related to financial reporting (Brumm and
Liu 2019).
For example: A2 milk company contract for 3 years with its suppliers for providing the
packaging material to pack its dairy product and rest all specifically mentioned in contract. But if
it found suppliers is not able to meet the requirement, in such the supplier open a factory on lease
to meet the rest requirement (Hoyle, Schaefer and Doupnik 2015). In such as A2 milk company

ADVANCED FINANCIAL ACCOUNTING
becomes customer to its supplier in such the customer cannot specifically control the lease as
being the customer the requirement related to product only can be control but controlling of the
factory will totally upon the supplier. So it can be conclude that customer cannot get the
economic benefit from the factory not even the right to direct the factory (Joubert, Garvie and
Parle 2017).
Answer to Q.3
The key discloser which A2 Milk Company made on it’s on its accounting for leases including
on the transitional provision like exemption on short term lease and the use of the situation when
determining the lease term (Stevenson 2015). As when company decides to apply the modified
retrospective method to transition, it need to disclose the borrowing rate on weighted average. If
the company has leases in different currencies, it may wish to consider disclosing separate rates
for each of the currencies; and an explanation of the difference between the present values of
operating lease commitment disclosed in its annual financial statements, discounted using the
discount rate at transition date; and the lease liabilities recognized at that date, a description of
the nature and effect of the new implementation resulting from the new accounting policies
which may include the new accounting policies and an explanation of any changes in opening
retained earnings (White and Fried 2018). One of the effective decision taken by management is
implementing the AAS 16, for example, whether to check of presence of lease or not, discount
rate need to be calculated, and whether any service/lease which can be separated (Joubert, Garvie
and Parle 2017). Significant changes in amount must be disclosed in interim financial statement,
which may include retain earning opening balance, and other measuring of performance like

ADVANCED FINANCIAL ACCOUNTING
EBDITA and free cash flow. And the selected of transition method with any other practical
method is applied. As business which chooses to apply the modified retrospective transitional
approach must consider that the requirement in the process of annual financial statement can be
taken as to understand the nature and effect from the change in policies and the business which
elect to apply the retrospective approach should consider the that annual financial statement can
explain the effect of change in policies. For example: Following the local regulators requirement
or exception, there need to be guidance of the relegation that may need to disclosures or
information to be consider in interim reports, in few cases some regulator may require the full
discloser in annual financial statement in the interim report and the impact from such changes.
The changes of disclosure may vary depend upon the financial statements at beginning of
implementing the AASB 16, the impact of discloser might cover more matters depending upon
the qualitatively or quantitatively material.
CONCLUSION
However to conclude this report it has separated in main three section discussing the answer to
the relevant question. As first answer to the answer stated the accounting concept of A2 Milk
Company, which discussed about the different principle and method applied in maintain and
recording of accounts of the company. As the implementation of new policies are taken in
retrospectively. The new standard have discussed that there will be no change in the short term
deposit and cash, trade and other receivable other than this there is no assets and liabilities and it
have change the process of recognizing the revenue. The second answer discussed about the
changes in A2 Milk Company incorporated in the latest accounting standard for lease AASB 16

ADVANCED FINANCIAL ACCOUNTING
which stating that uses of assets and some other expenditure need to be shown in balance sheet
as before standard does not have any such rule, by implementing the such standard stakeholders
will economically benefit. As the change in accounting in lease have brought a big impact in
financial statement which were not present in past. The effect of the new such changes is not just
active it is proactive in nature. And one of the big change is the mandatory of showing the future
payment in the balance sheet. The last answer discussed about the discloser on accounting
related to lease and effect to AASB 16 from AASB 117. It have discussed about the leases
accounting with the transitional provision like full deduction on short term lease. As the
company came up with decision to implement retrospective to transition, it becomes mandatory
for the company to disclose the borrowing rate as per the method. It is also to be consider that if
a company has lease on more than one currency, it have to disclose it in separate of each
currency form and the explanation need to be given for such disclosure. As the result of such
disclosure will make the company financial position more transparent which will directly help
the investors, creditors and shareholder to make economic decision. After such transparency
company goodwill will improve as it ensure much of the fair and actual position of the company.

ADVANCED FINANCIAL ACCOUNTING
REFERENCE LIST
Jones, S. and Higgins, A.D., 2016. Australia's switch to international financial reporting
standards: a perspective from account preparers. Accounting & Finance, 46(4), pp.629-652.
Psaros, J.I.M. and Trotman, K.T., 2004. The impact of the type of accounting standards on
preparers’ judgments. Abacus, 40(1), pp.76-93.
Potter, B., 2015. Financial accounting reforms in the Australian public sector: an episode in
institutional thinking. Accounting, Auditing & Accountability Journal, 15(1), pp.69-93.
Baker, R.E., Lembke, V.C., King, T.E., Jeffrey, C.G. and Christensen, T., 2015. Advanced
financial accounting. New York: McGraw-Hill.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The
Journal of New Business Ideas & Trends, 15(2), pp.1-11.
White, G.I., Sondhi, A.C. and Fried, D., 2018. Financial statements. John Wiley & Sons Inc.
Stevenson, K.M., 2015. The changing IASB and AASB relationship. Australian Accounting
Review, 22(3), pp.239-243.

ADVANCED FINANCIAL ACCOUNTING
Morales Díaz, J. and Zamora Ramírez, C., 2018. IFRS 16 (leases) implementation: Impact of
entities’ decisions on financial statements. Aestimatio: The IEB International Journal of
Finance, 17, 60-97.
Brumm, L. and Liu, J., 2019. New leasing accounting standard. Taxation in Australia, 53(8),
p.449.
Svoboda, P. and Bohušová, H., 2017. Amendments to IAS 16 and IAS 41: Are There Any
Differences between Plant and Animal from a Financial Reporting Point of View?. Acta
Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 65(1), pp.327-337.
De Villiers, R.R. and Middelberg, S.L., 2018. Determining the impact of capitalising long-term
operating leases on the financial ratios of the Top 40 JSE-listed companies.
Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating to
capitalised leases. Pacific accounting review, 29(1), pp.34-54.
Brumm, L., 2019. New leasing accounting standard. Taxation in Australia, 53(8), p.449.
Giner, B., Merello, P. and Pardo, F., 2019. Assessing the impact of operating lease capitalization
with dynamic Monte Carlo simulation. Journal of Business Research, 101, pp.836-845.
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
Sacarin, M., 2017. IFRS 16 “Leases”–consequences on the financial statements and financial
indicators. The Audit Financiar journal, 15(145), pp.114-114.

ADVANCED FINANCIAL ACCOUNTING
Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard" IFRS 16 Leases" on Statement of
Financial Position and Key Ratios: A Case Study on an Airline Company in Turkey. Business
and Economics Research Journal, 7(4), p.143.
Tănase, A.E., Calotă, T.O. and Oncioiu, F.R., 2018. The Impact of IFRS 16 on the Companies’
Key Performance Indicators: Limits, Advantages and Drawbacks. Academic Journal of
Economic Studies, 4(1), pp.54-59.
Cotter, D., 2017. Advanced financial reporting: A complete guide to IFRS. Financial
Times/Prentice Hall.

ADVANCED FINANCIAL ACCOUNTING

ADVANCED FINANCIAL ACCOUNTING

ADVANCED FINANCIAL ACCOUNTING

ADVANCED FINANCIAL ACCOUNTING