Impact of AASB 16 on ANZ Bank: Lease Accounting Changes

This essay discusses the impact of AASB 16 on ANZ Bank and the banking industry in Australia. It highlights the changes in lease accounting and their effects on the balance sheet, income statement, and cash flow statement. It also covers the lifecycle and stages of lease agreements for the banking sector.

Running head: ADVANCED ISSUED IN ACCOUNTING
Advanced Issued in Accounting
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The findings of the essay indicates towards the fact that the main reason for the adoption of the new lease standard
of IASB 16 Leases is to diminish the inconsistency in the lease standard of AASB 117 Leases where the lessees are
not required to report their large operating lease assets and laities in the balance sheet. The findings also show that
the balance sheet and income statement of the companies will be large affected with this single lease model due to
the reporting of large lease liabilities in the balance sheet. The banking sector of Australia will also be affected with
the implementation of IFRS 16.

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Introduction
The dependency of business organizations on different sources of financing can be seen and Lease is
considered as one of the most popular sources of financing for the companies. Businesses use lease for both
medium and long-term financing needs. Lease can be considered as a special agreement where a party receives the
right for using a particular asset from another party on the basis of rental payments (Munene, 2014). Lease can be of
two types; they are Operating lease and Finance lease. Formerly, companies were required to follow the standards of
AASB 117 Leases for lease accounting, but from January 1, 2019, they are required to follow the new lease standard
that is AASB 16 Lease (IFRS 16 Leases). The aim of this essay is to highlight the major differences between AASB
117 and AASB 16 along with their impact on ANZ Bank.
Lease Arrangements
There are two types of leases under the standard of AASB 117 that are operating lease and finance lease.
As per this standard, the obligation is on the companies to report the financial lease assets and liabilities in the
company’s balance sheet. At the same time, companies are needed to ensure the disclosure of operating lease
information (Fitó, Moya & Orgaz, 2013). In case of finance lease, lessees hold the ownership of the lease assets at
the end of the lease term; in case of operating leases, the lessors hold the asset ownership for the whole lease term
(Morrell, 2013). Under AASB 117, there is not any obligation on the lessees to report the huge amount of operating
lease assets and liabilities in the balance sheet and AASB 16 has been introduces to remove this inconsistency
(aasb.gov.au, 2019).
The introduction of AASB 16 has brought certain major changes in lease accounting when compared to the
existing lease standards that is AASB 117. AASB 16 demands the commitment from the lessees to adopt a single
lease accounting model that diminishes the differentiation between operating and finance lease as the companies will
be needed to enlist all lease contracts under leases. Under AASB 16, the obligation is on the lessees to report the
present value of right-of-use lease assets and lease liabilities in their balance sheets, but short-term leases are
exempted from this regulation. Companies will be needed to treat the right-of-use assets as the normal non-current
assets where they will be depreciated as well as tested for impairment in accordance with the standard s of AASB
116 Property, Plant and Equipment and AASB 136 Impairment of Assets respectively (aasb.gov.au, 2019).
In addition, companies need to treat the inabilities as normal liabilities where they will recognize their
interest in accordance with AASB 140 Investment Property. Ensuring strict compliance with the disclosure objective
of AASB 16 is a major requirement of this new standard (aasb.gov.au, 2019). In addition, correct reporting of right-
of-use assets is needed from the companies where it is needed for them to report depreciation expenses and interest
associated with them in the income statement. Apart from this, companies are needed to ensure certain classification
related to lease liabilities and right-of-use assts in the cash flow statement like cash payment for lease liabilities,
payments for short-term leases and others. In this context, it needs to be mentioned that the aim of the introduction

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of AASB 16 is to ensure increasing the financial reporting quality and transparency through faithful representation
of lease assets and liabilities (Joubert, Garvie & Parle, 2017).
Overview of ANZ and Their Leases
The Australia and New Zealand Banking Group Limited, commonly know n as ANZ, is considered as the
third largest bank in Australia in terms of market capitalization. ANZ was established in the year of 1835 and it is
headquartered at Melbourne, Australia. Major business operations of ANZ can be seen in the commercial and retail
banking sector of the country. In New Zealand, ANZ is the largest bank and the legal entity of ANZ is known as
ANZ Bank New Zealand Limited (anz.com, 2019). It can be seen from the annual report of the bank that the bank
has been involved in certain lease related transactions during the year and they are discussed below.
The 2018 Annual Report of ANZ indicates towards the fact that the bank has reported certain information
of their lease commitment in the financial statements. ANZ has used certain regulations for the recognition and
measurement of their leases. The bank classifies the contracts as finance lease in case the risk and rewards related to
the ownership of the lease assets substantially transfer to the customers or an unrelated third party. It can be
observed from the annual report of ANZ that the lease assets of the bank are land and boiling and furniture and
equipment (shareholder.anz.com, 2019). According to the 2018 Annual Report of ANZ, total lease rental
commitments of the bank for the years 2018 and 2017 are $1636 million and $2011 million respectively. Among
these, the lease rental commitments of ANZ due within one year are $371 million for 2018 and $461 million for
2017. The lease rental commitments of the bank due later than one year but not later than five years are $832 million
in 2018 and $1042 million in 2017. Lastly, the lease rental commitments of ANZ due later than five years are $433
million and $508 million for the years 2018 and 2017 respectively. These are the amounts of leases currently listed
in the latest annual report of ANZ (shareholder.anz.com, 2019).
Impact of AASB 16 on ANZ
The knowledge about the fact can be obtained from the 2018 Annual Report of ANZ that the company
needs to adopt the new lease standards of AASB 16 on mandatory basis from 1st January, 2019; and there will be
certain material impact on the financial position of the bank due to the adoption of this standard. However, the new
standard is not effective for the bank until 1st October, 2019. As per the regulation of AASB 16, it will be the
obligation on ANZ for the recognition of right to use assets for using he fundamental leased assets as right-of-use
assets; in addition, they are needed to recognize their obligations for making the lease payments as a lease liability
(shareholder.anz.com, 2019). After that, the standards of AASB 16 considerably carry forward the accounting
requirement of the lessors in AASB 117 Leases. It can be seen from the 2018 Annual Report of ANZ that the bank
is evaluating the material impacts of the adoption of AASB 16 on their financial position and they are not yet able in
rationally estimating the impact of AASB 16 adoption on the financial statements. However, it can be said that it
will increase the liability of the bank as they will be needed to report large among of operating lease liabilities in the
balance sheet (shareholder.anz.com, 2019).

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Short-term and Long-term Impacts on Lease Accounting
Impact on Balance Sheet: It can be seen from the earlier part of the discussion that the implementation of the new
lease standard of AASB 16 will create significant impact on the balance sheet of ANZ in the presence of their
mandatory obligation of reporting the huge amount of lease liabilities in the balance sheet ( Blanchette et al., 2013).
At the same time, right-of-use assets also need to be reported in the balance sheet by the bank. According to the
above discussion, $1636 million is the operating lease commitment of ANZ for the year 2018 and hence, as per the
requirement of AASB 16; they will be forced to show this liability in the balance sheet. It will increase the financial
obligation of the bank as a result of the increase in the liabilities. It will create adverse situation for the bank (Wong
& Joshi, 2015).
Impact on Income Statement: Along with the balance sheet, the implementation of the new lease standard of AASB
16 will also have certain effects on the income statement of ANZ. In the income statement, the net profit of ANZ
will be impacted due to the fact that it will be obligation on the bank to report the amount of interest payable as well
as receivable from lease liabilities and right-of-use assets (Karampinis & Hevas, 2013). In this context, it needs to be
mentioned that the bank will have to incur large amount of expenses at the time of the implementation of the new
lease standard of AASB 16 and they will have to report this large amount of expenses in the income statement which
will contribute towards the decrease in the net profit of the bank. These are the major impacts on the income
statement due to the adoption of new lease standard of AASB 16. This will lead to the increase in operating margin
ratio of the bank (Cascino & Gassen, 2015).
Impact of Cash Flows Statement: Unlike the income statement and the balance sheet, the implementation of the new
lease standard of AASB 16 will not have any impact or effect on the statement of cash flows of ANZ. This is
because the new lease standard of AASB 16 does not have relation with the inflow or outflow of cash in the
company. However, it will be needed for ANZ to take decision on the fact that they need to include the payment for
the interest on lease liability along with the interest received on the right-of-use assets under the cash flow from
financing activities in the statement of cash flows. These will be the impact on the statement of cash flows (Spencer
& Webb, 2015).
Lease Agreements for Australian Banking Sector along with the Lifecycle and Stages
It needs to be mentioned that ANZ operates in the banking industry and the adoption of AASB 16 will have
certain impacts on the banking industry and the lifecycle of the stage of lease. It can be assessed with the assistance
of the following figure:

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(Source: ey.com, 2019)
As per the above table, the banking industry will be majorly affected with the implementation of AASB 16
in the presence of the fact that entities under this industry having extensive branches along with large administration
and call centers will need to carefully consider the lease arrangements. In addition, they will be needed to assess the
contracts over ATSs and related spaces engaged by these machines as per the new lease regulation of AASB 16. The
banks will be needed to monitor the treatment of right-of-use assets for the regulatory capital requirements (ey.com,
2019).
In addition, entities under the banking industry need to consider the financial reporting effects of the
adoption of AASB 16. More specifically, they will be needed to assess the impact of this new lease model on
banking activities, budgeting, key metric and contract negotiation. It will be critical for the banks to identify the
complete lease inventories including embedded and intercompany leases for effective capital planning ( pwc.com,
2019). On 6th April, 2017, the Basel Committee made the fact clear that the right-of-use assets related to
fundamental intangible assets should not be deducted from the regulatory capital. They are not similar to intangible
assets and need to be included in risk-based capital and leverage denominator at 100 per cent risk weighting, same
as the treatment of tangible assets. For regulated banks, the recognition of right-of-use may create impact on
regulatory capital ratio calculation by increasing the assets in the denominators of the risk-based capital ratios and
leverage capital ratios. Banks with large portfolio of leases need to assess their ability for gathering the needed
information on the existing leases for carrying them forward in the new lease model (deloitte.com, 2019).

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Conclusion
To infer, companies will be needed to recognize the right-of-use assets and lease liabilities under the single
lease model of AASB 16. It will affect the balance sheet of company by largely increasing lease liabilities and
income statement for the inclusion of lease interest receivable as well as payable and cost to implement the lease
standard. At the same time, this new lease stand will create impact on the regulatory capital requirements of the
banks by affecting the risk-based capital ratios and regulatory capital ratios. In addition, it will put the obligation on
the banks to carefully consider their lease arrangements.

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References
AASB 117. (2018) Leases. Retrieved 29 December 2018, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB117_08-15.pdf
AASB 16. (2018) Leases. Retrieved 29 December 2018, from
https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf
Annual Report / Annual Review | ANZ Shareholder Centre. (2019). Shareholder.anz.com. Retrieved 13 January
2019, from https://shareholder.anz.com/annual-report-annual-review
Blanchette, M., Racicot, F. É., Sedzro, K., & Simonova, E. (2013). IFRS adoption in Canada: An empirical analysis
of the impact on financial statements. Certified General Accountants Association of Canada, ISBN, 978-1.
Cascino, S., & Gassen, J. (2015). What drives the comparability effect of mandatory IFRS adoption?. Review of
Accounting Studies, 20(1), 242-282.
Deloitte. (2019). Deloitte Insights: IFRS 16 – Leasing. Retrieved 13 January 2019, from
https://www2.deloitte.com/content/dam/Deloitte/cy/Documents/financial-services/
CY_FinancialServices_IFRS16_Leasing_Noexp.pdf
Ey.com. (2019). A summary of IFRS 16 and its effects. Retrieved 13 January 2019, from
https://www.ey.com/Publication/vwLUAssets/ey-leases-a-summary-of-ifrs-16/$FILE/ey-leases-a-
summary-of-ifrs-16.pdf
Fitó, M. À., Moya, S., & Orgaz, N. (2013). Considering the effects of operating lease capitalization on key financial
ratios. Spanish Journal of Finance and Accounting/Revista Española de Financiación y
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Joubert, M., Garvie, L., & 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. Journal of New Business Ideas &
Trends, 15(2).
Karampinis, N. I., & Hevas, D. L. (2013). Effects of IFRS adoption on tax-induced incentives for financial earnings
management: evidence from Greece. The International Journal of Accounting, 48(2), 218-247.
Morrell, P. S. (2013). Airline finance. Ashgate Publishing, Ltd..
Munene, W. W. (2014). The effect of lease financing on the financial performance of companies listed at the
Nairobi securities exchange. Unpublished M. Sc. thesis, Department of finance and accounting, School of
Business, University of Nairobi.

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Our company | ANZ. (2019). Anz.com. Retrieved 13 January 2019, from http://www.anz.com/about-us/our-
company/
Pwc.com. (2019). The leases standard A summary of the new model and its potential impact: Banking & Capital
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supplement-ifrs-16-leases.pdf
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lessees. Accounting Horizons, 29(4), 997-1023.
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