Impact of AASB 16 on Lease Accounting: A Case Study of Wesfarmers

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

1ADVANCED ISSUED IN ACCOUNTING
Executive Summary
The aim of this essay is to provide the review of the new lease standard AASB 16 along with its impact on various
areas of financial reporting of Wesfarmers Limited. The company will have to report both the lease liabilities and
right-of-use lease assets in the balance sheet along with some additional disclosures under the new lease standard.
These will increase the financial reporting transparency and quality.

2ADVANCED ISSUED IN ACCOUNTING
Introduction
The presence of many sources of financing can be seen for the business organizations and Lease Financing
is considered as one of them. Lease is considered as one of the most important source of medium and long-term
financing where the owner of a particular asset provides another person with the right to use that particular asset
against the periodic payments. The presence of two types of leases can be seen; they are Finance Lease and
Operating Lease. Business organizations have the obligation to follow the AASB lease standards for the accounting
of leases in the companies. In Australia, the companies are needed to comply with the principles and standards of
AASB 117 Leases for the purpose of lease accounting. According to the recent development of the Australian
Accounting Standard Board (AASB), there is the introduction of the new accounting standard for lease that is AASB
16 and all the Australian companies are needed to comply with this new lease standard from January 1, 2019 on
mandatory basis. The main aim of this report is the analysis and evaluation of the different aspects of this new lease
standard along with the existing one. This report also considers the analysis of lease accounting in Wesfarmers and
the impact of new lease standard on the financial statements.
Understanding of the Lease Arrangements
Operating vs. Financial Leases
As per the existing lease standard that is AASB 117, Operating Leases and Financial Leases are the two
types of leases; and the standard puts the obligation for the reporting of finance lease assets and liabilities in the
balance sheet. As per AASB 117, it is needed for the companies to disclose information about the operating leases.
The lessor has the asset ownership for the overall lease term in case of operating lease and the asset ownership stays
with the lessee at the end of the lease term in case of finance leases. However, the main reason for the introduction
of AASB 16 is that AASB 117 does not put the obligation on the companies to report the material amounts of
operating leases in the balance sheet (aasb.gov.au, 2018).
Changes in Lease Accounting Under the New Lease Standard
Certain changes are there in AASB 16 as compared to AASB 117, but the lease accounting for lessors will
remain unaltered. However, the lessees will be needed to adopt a single model for lease accounting. All the lease
contracts will be categorized under leases. The lessees will be required to consider the present value of the lease
liabilities along with the right-of-use assets in the balance sheet, but the short-term leases with owe values are the
exception. After that, as per AASB 116 Property, Plant and Equipment and AASB 136 Impairment of Assets, the
right-of-use assets will be depreciated and impaired respectively. In case of lease liabilities, interest would be
recognized as per AASB 140 Investment Property (aasb.gov.au, 2018). It is needed for both lessor and lessee to
adhere to the disclosure objective instead of rigorous checklists under AASB 16. It is needed for the lessees to report
right-of-use assets characteristically in the balance sheet along with the separate note for them. Separate segregation
is needed for depreciation and interest expenses in the profit and loss statement along with the categorization of the