AASB 16 Accounting Standard for Leasing - Implications for Telstra Group

The study seeks to analyse the implication of the AASB 16 accounting standard for leasing and its impact on the financial performance of Telstra Group. Telstra operates in the Australian telecommunication sector and provides several communication services to the market. AASB 16 have significant effects on the financial performance of Telstra. The new accounting standard for leasing requires companies to disclosure operating leases in the balance sheet. As a result, the amount of interest in rental expenses would increase. Moreover, both the EBITDA and EBIT will increase while the net income will decrease.

AASB 16: Contemporary Issues 1
Contemporary Accounting Issues
AASB 16 accounting standard for leasing
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AASB 16: Contemporary Issues 2
Executive Summary
The study seeks to analyse the implication of the AASB 16 accounting standard for leasing and
its impact on the financial performance of Telstra Group. Telstra operates in the Australian
telecommunication sector and provides several communication services to the market. AASB 16
have significant effects on the financial performance of Telstra. The new accounting standard for
leasing requires companies to disclosure operating leases in the balance sheet. As a result, the
amount of interest in rental expenses would increase. Moreover, both the EBITDA and EBIT will
increase while the net income will decrease. Telstra Group Company will be required to
recognize 4,124 million of liabilities in its balance sheet. Generally, AASB 16 brings about
transparency, comparability, and reliability of financial statements and reports. Comply with
AASB 16 Telstra should: First, improve the collaboration between its departments. Second,
invest in training of its employees on the applicability and impact of AASB 16. Third, seek the
help of lease experts to develop an internal framework that will guide the company towards
complying with the standard. Fourth, invest in technical and system resources that are required to
abide by the AASB 16.
Table of Contents

AASB 16: Contemporary Issues 3
Executive Summary..........................................................................................................................2
Introduction......................................................................................................................................2
Application of the AASB 16, Leases...............................................................................................3
Analysing the impact AASB 16 on Telstra......................................................................................4
Positive implications on various stakeholders about decision making............................................6
Conclusion and Recommendations..................................................................................................7
References List.................................................................................................................................8
AASB 16 accounting standard for leasing contemporary issues

AASB 16: Contemporary Issues 4
Introduction
The 2019 financial year has seen the introduction of three accounting standards that are likely to
impact the performance of the Accounting business entities. The new accounting standards are
the AASB 15, which address revenue from Contracts with Customers and the AASB 16, which
changes how companies' disclosure leases (AASB, 2019).
Moreover, the AASB 9 introduces changes in the financial Instruments primarily how companies
treat financial asset impairments as well as measurement and classification of financial assets.
According to a report released by Deloitte, firms operating in the construction, engineering, and
Technology, Media and Telecommunication (TMT) industry which be profoundly impacted by
the changes in accounting standards (Vengadasalam, 2018). This study analyzes the impact of
AASB 16, Leases contracting on the performance of the Telstra Group as well as the
stakeholders.
Telstra operates in the Australian telecommunication sector. The company provides several
communication services to the market, which mostly comprises of corporate consumers. In
particular, Telstra provides retails services, retail mobile services, and data services to 18 million,
3.7 million, and 1.7 million consumers, respectively. For effective performance, Telstra relies on
leasing of assets and other services. Likewise, the company leases out its assets and services to its
partners. Therefore, the AASB 16 has a significant impact on the accounting and data
performance of Telstra Group.
Application of the AASB 16, Leases
The new accounting standard for lease (AASB 16) was introduced to address the drawbacks
under the previous AASB 117 accounting for leases. AASB 16 particular changes the

AASB 16: Contemporary Issues 5
applicability of lease accounting by business entities. Under the last accounting for leases
standards, companies only disclosed finance leases in the balance sheet. Operating leases were
kept off-balance sheet. Preparers of financial reports took advantage of the drawback to list most
leases as operating. The reports misrepresented the true financial position of entities. More
reports prepared using the AASB 117 could not be relied on by stakeholders to make informed
decisions. Lastly, the report did not support the comparability financial statement across sectors
of industries (Mills, 2017).
AASB 16 became effective on January 1, 2019, but was extended by a year to January 1, 2020,
for companies to comply with the new requirements fully. The new accounting standard for lease
states that entities should disclose both the finance and operating lease items in the balance sheet
as either assets or liabilities. AASB will provide an accurate representation of the business
financial position after considering all the assets and liabilities. Moreover, shareholders and
investors will be offered more reliable information in financial statements and reports to make
informed decisions (Deloitte, 2019).
However, AASB 16 comes with several disadvantages as well. One, financial and commercial
risks are likely to increase after the accounting standard becomes fully effective. The risks might
arise from hidden and complex issues within AASB 16. Two, expense profiling will change from
the previous straight-line rental expenses. Lessees' will pay more expenses at the begging on a
lease contract and less at the end of the contract. Three, an increase in expenditures would result
in reduced profitability and a subsequent reduction on the dividend payout. Four, companies will
have difficulties when separating non-current and current assets and liabilities. Generally, AASB
16 would lead to an increase in the reported assets and liabilities, an increase in expenses, and a
decrease in net income (Ohm, 2019).

AASB 16: Contemporary Issues 6
Analysing the impact AASB 16 on Telstra
The new standard will impact the definition of lease contracts. A contract will be treated as a
lease if a) it is associated with identifiable assets, or b) the lessee still controls the use of an
identified asset. Therefore, Telstra will have to assess the impact of the new standard on its
telecom assets such as network tower space and the rights to use assets. However, assets with low
values such as laptops and those with a duration of at most 12 months are exempted from the
impact of the new standard (Ohm, 2019).
AASB 16 will impact three areas of operations for Telstra. First, the elimination of off-balance
sheet accounting will force Telstra to capture all the data relating to the operating lease. The
company will require advanced lease track systems as well as improving the control of leases.
Maintaining the integrity and reliability of lease information will come with extra costs. Second,
AASB will affect the company's performance in the market. The required recognition of lease
liabilities and the right to use will cause interest expenses and depreciation hence causing
increases in EBITDA and EBIT. Subsequently, the net income of the company will decrease. The
new development will as well affect Telstra's gearing ratios and debt covenants (Deloitte, 2019).
According to the Australian Securities and Investments Commission (ASIC), AASB 16 will
impact the income statement, but the cash flow statement will remain unaffected. The ASX 100
companies are expected to recognise approximately 100 billion of liabilities in their balance sheet
from January 1, 2019. Telstra Group Company will recognise 4,124 million of liabilities in its
balance sheet. An increase in the company's liabilities will have an impact on its gearing ratio.
Telstra dependency on debts over equity will increase, considering that the equity remains
unchanged. The increase of the company's EBITDA and EBIT will impact the net debt to

AASB 16: Contemporary Issues 7
EBITDA ratio as well; The rate is expected to increase from 1.0 time in 2018 to 3.7 times in 2019
onwards (Poljak, 2019).
Lastly, AASB 16 will cause a decrease in the stock price based on the reduction of earnings. With
the introduction of rental expenses, the EBITDA will increase compared to the amount reported
under the AASB 117. The profitability of a company influences the price of its shares in the
market. Therefore, the cost of stock of Telstra will be cheaper in the market than before.
Therefore, investors will have an advantage because they would buy more shares than before
using the same amount (Deloitte, 2019).
AASB 16 will also increase interaction across different departments. The standard brings about
technical challenges will force Telstra to either increase the number of personnel or outsource
some accounting services. Addressing the leasing transaction will involve different departments.
For example, the procurement and accounting departments will be required to work closely. The
company will also have to train the employees on the applicability and expected changes under
the AASB 16. Moreover, Telstra will incur an extra cost to hire professionals who will train and
monitor the application of the new accounting standard by the employees (Deloitte, 2019).
Positive implications on various stakeholders about decision making
Although the new accounting standard for lease is deemed complicated, it will bring
comparability and transparency in financial reporting. Different stakeholders rely on financial
reporting to make decisions. Investors use the reports to appraise investment opportunities.
Financial performance is a critical indicator of the future performance on the company's stock in
the market. The government relies on a financial statement to seek compliance with tax
obligations. Shareholders use net income to demand an increase of dividend paid per share.

AASB 16: Contemporary Issues 8
Creditors, use gearing ratio and other market efficiency ratios to determine the ability of Telstra
to service its loan obligations. Relying on misleading financial reports lead to misinformed
decisions (Vengadasalam, 2018).
AASB 16 will provide a faithful representation of the Telstra's financial statement by eliminating
the guesswork that was used under the AASB 117/ IASB17. The introduced changes will
enhance the trust between Telstra and its lessors and lessees. AASB 117 limited fair competition
based on the financial performance for companies in the telecommunication sector. Companies
would inflate their performance to increase their market value and attract potential investors.
Moreover, companies were likely to maintain different books of accounts for various purposes
(Mills, 2017). For instance, low net income would be presented for taxation purpose, while high
net income would be given to the shareholders and investors. With AASB 16, companies are
under obligation to adhere to a common practice hence enhancing competition in the market.
Investors will rely on accurate information to make decisions. The government will use the
faithful presentation of Telstra's performance in a given year to tax the company. Lastly, financial
evaluators will have reliable financial reports to use when analysing and comparing the
performance of Telstra to its peers in the telecommunication sector (AASB, 2019).
Conclusion and Recommendations
AASB 16 will have a significant impact on the financial performance of Telstra and other ASX
listed companies. The new accounting standard for leasing requires companies to disclosure
operating leases in the balance sheet. Likewise, the amount of interest rental expenses would also
increase, leading to an increase of EBITDA and EBIT and a decrease in net income. Telstra
Group Company will have to recognize 4,124 million of liabilities in its balance sheet. The
amount represents the operating lease amount, which was previously kept off the balance sheet.

AASB 16: Contemporary Issues 9
Generally, AASB 16 brings about transparency, comparability, and reliability of financial
statements and reports.
Telstra will have to put in place technical and systemic changes in place to adhere to the
requirements of this standard. Based on the findings, Telstra should address two key issues. First,
improve the collaboration between its departments. Second, invest in continuous training of its
employees on the applicability and impact of AASB 16. Third, seek the help of lease experts to
develop an internal framework that will guide the company towards complying with the standard.
Fourth, invest in technical and system resources that are required to abide by the AASB 16.
References List
AASB, 2019. AASB 16 Leases - Assess The Financial Impact Now. [Online]
Available at: https://www.pkf.com.au/blog/2018/aasb-16-leases-assess-the-financial-impact-now/
[Accessed 18 May 2019].

AASB 16: Contemporary Issues 10
Deloitte, 2019. Three Accounting Standards that will shake up the Australian Technology, Media
and Telecom (TMT) sector. [Online]
Available at: https://www2.deloitte.com/au/en/pages/technology-media-and-
telecommunications/articles/accounting-standards-shake-australia-technology-media-telecom-
sector.html#
[Accessed 22 May 2019].
Mills, J., 2017. Thoughts on the impact of changes to AASB 16. [Online]
Available at: https://www.intelligentinvestor.com.au/thoughts-on-the-impact-of-changes-to-aasb-
16-1878181
[Accessed 18 May 2019].
Ohm, M., 2019. New Leasing Standard (AASB 16) Brings Significant Impacts. [Online]
Available at: https://www.hlb.com.au/new-leasing-standard-aasb-16-brings-significant-impacts/
[Accessed 18 May 2019].
Poljak, V., 2019. $100b of lease liabilities headed for balance sheets. [Online]
Available at: https://www.afr.com/markets/equity-markets/100b-of-lease-liabilities-headed-for-
balance-sheets-20190320-p515ol
[Accessed 22 May 2019].
Vengadasalam, V., 2018. AASB 16 New Lease Standard: 1st January 2019. [Online]
Available at: https://www.accru.com/2018/10/aasb-16-new-lease-standard/
[Accessed 18 May 2019].