Changes in Accounting Policy and Methods: AASB 117 to AASB 16

The report discusses the changes in accounting policy and methods from AASB 117 to AASB 16 and their implications on financial statements. It covers the classification of assets and liabilities arising from a lease, accounting treatment for lessee and lessor, and the impact on Frankston Ltd.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
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1ADVANCED FINANCIAL ACCOUNTING
Executive Summary
The aim of the report is to study the changes in various accounting policy and methods. The
project deals about the changing accounting standards and practices from AASB 117 to AASB
16. The project also deals with the various aspects of accounting effect on a company’s financial
statements. The change in the accounting policy and principal guideline will give a broad base
for all assets and liabilities to be included in the financial statements. The importance of AASB
16 and its implications on the Frankston Ltd Company is widely covered in the assignment.

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Table of Contents
Introduction......................................................................................................................................3
Discussions......................................................................................................................................3
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
The term lease defines grant of property, plant and equipment and other assets for using it
for a certain period. A lease is a rental agreement between the two parties where the party agrees
on for renting out an asset or a property to another party for a certain period. The two parties
involved in the agreement is the lessee, which is the user of an asset who is taking on rent a
certain class of asset. Whereas, the lessor is the owner of that assets which is giving assets on
hire to the lessee to define the terms and conditions of the lease agreement (Joubert, Garvie &
Parle, 2017).
The key terms included in the leasing are lease payments and lease terms. The report
summarizes about the different treatment of accounting policy and procedures used in the AASB
16 leases and AASB 117 leases (Wong & Joshi, 2015).
The AASB 16 classifies all assets and leases in the in the financial statements of the
company. The new accounting standard also reduces complexity involved in the application of
lease agreements used by Frankston Ltd (Update, 2018).
Discussions
The AASB 16 identifies all assets and liabilities in the due course of the business arising
from a lease. The new accounting standard also shows two exceptions like the assets, which are
leased for a duration, which is less than 12 months or less or assets whose book value or the
nominal amount is very low which is crucial for Frankston Ltd. The AASB 117 has been not able
to deliver better financial representation of the financial statements because of the traditional
accounting concepts and models used which could cater to the larger group of users. The
indication of assets whether it is on lease or not was too complicated. There were many leases,

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which the AASB 117 could not recognize in the financial statements (Edeigba & Amenkhienan,
2017). The new accounting standard introduced AASB 16 provided much smoothening in the
financial statements of the company by enabling the company recognizing assets and liabilities,
which previously was not recognized by the old accounting standard (Xu, Davidson & Cheong,
2017).
Frankston Ltd should observe that the increase or the rise in the company’s debt in the
form of lease payments and assets in the form of leased assets could have significance impact on
the financial statements of the company. The AASB 16 could change the accounting methods, as
the lease expenses are usually front-loaded, i.e. it means that the payments in the initial years of
the assets will be quite higher. The reported expenses could significantly influence the variability
in the operations of the company. AASB 16 clearly defines assets and liabilities to be reported in
both the parties’ books if the lease is for a period greater than 12 months of time. In terms of
assets, the right to use the assets should be clearly mentioned and recorded in both the parties’
books. Whereas the liability arising from such leases be clearly written down if, the same is non-
reversible. At the initiation of the lease contract, the right to use the assets right should be
transferred from the lessor to the lessee. The lease agreement should clearly define the key points
of lease such as the commencement date, the end of lease terms, the fixed payments involved in
the same. The AASB 16 has some materials note down during the lease terms such as if there
will be any fixed payment, which is to be made by the lessee to the lessor. The Guaranteed
Residual or the Price of bargain available at the end of the contract. There are certain options
embedded in the lease agreement, which should be disclosed. The Purchase option is one where
the lessor is entitled to purchase the assets from the lessor at the lease period or after that at a
certain period (Holland, 2016).

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The accounting or recording of lease by the lessee in the books of lessee will generally
include the present value of all lease payment to be made by the lessee by the lessor. The amount
payable for terminating a lease agreement is decided at the initiation of the contract. The interest
rate or the discount rate used in the lease is the rate that cause the present value of the lease. The
rate also equals the residual or salvage value of the assets equal to the fair value of the assets and
if there is any direct costs related to it. There are many a times observed that the lease contracts
have certain costs included those costs and expenses should not be capitalized in the balance
sheet treating as an long term item rather its should be classified as an expense and should hit the
income statement of the company. The liability standing in the books of the lessee for the lease
payment done will be reduced by each year by the amount of lease payments made each year.
This reduction will include interest expenses and partly repayments of the lease liability, which
are arising in the lease agreement. Every leased asset in the financial statements will be required
to amortize over the lease period (Tan‐Kantor, Abbott & Jubb, 2017).
The lessor provides the assets to the lease or to the user of the assets. Therefore, for the
lessee it is a present value of all lease payments to be paid to the lessor will be recorded in the
liability side of the balance sheet for the company. Whereas the lessor will record such lease as
payment receivables. Similarly, the lessee records interest revenue from the lessor. From the
point of view of lessor lease is classified and divided into finance and operating lease. The
finance lease is a type of lease where the where the transfer of all risk and reward is substantially
transferred from the lessor to lessee. The operating lease is a common case where the ownership
of reward and risk transfer between the two parties of agreement. Short-term leases where the
assets are taken for a shorter period are classified into operating lease. Lease which are for a
prolonged period of time such that the value of the assets will be at a negligible amount such

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type of lease will be considered as finance lease. There are certain cases even when the lessor
itself just provides financial assistances and resources required for acquisition of the assets in the
form of loan (Lewis, 2018). The same asset is been given to the lessee by the lessor and the legal
title remains with the lessor and it is the lessor who will then receive regular payments from the
assets. The risk and reward of ownership is usually transferred to the lessee, as the asset acquired
is unique or customized (Dakis, 2016).
Conclusion
The AASB 16 has brought up with the new accounting policy and by removing hurdles in
the AASB 117 in relation to the adjustments of lease. Frankston Ltd should clearly defines its
assets as an operating or financing lease in accordance to the term and type of lease between the
parties. Frankston Ltd could have positive impact on the financial statements and on operating
business if the lease is classified as an operating lease given the fact that the assets are used and
replaced for a shorter period.

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References
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
Edeigba, J., & Amenkhienan, F. (2017). The Influence of IFRS Adoption on Corporate
Transparency and Accountability: Evidence from New Zealand. Australasian
Accounting, Business and Finance Journal, 11(3), 3-19.
Holland, D. (2016). Simplifying income recognition for not-for-profit entities. Governance
Directions, 68(11), 666.
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).
Lewis, I. (2018). How Will the New Leasing Standard Impact Loan Covenants, and are These
Concerns Warranted.
Tan‐Kantor, A., Abbott, M., & Jubb, C. (2017). Accounting Choice and Theory in Crisis: The
Case of the Victorian Desalination Plant. Australian Accounting Review, 27(3), 273-284.
Wong, K., & Joshi, M. (2015). The impact of lease capitalisation on financial statements and key
ratios: Evidence from Australia. Australasian Accounting, Business and Finance Journal,
9(3), 27-44.
Xu, W., Davidson, R. A., & Cheong, C. S. (2017). Converting financial statements: operating to
capitalised leases. Pacific Accounting Review, 29(1), 34-54.