Accounting Concepts and AASB 16: Incitec Pivot Limited

This report discusses the accounting concepts used by Incitec Pivot Limited and the changes incorporated in the new accounting standard for lease AASB 16. It also summarizes the key disclosures made by the company on its accounting for leases, including the transitional provision and the effect of the transition to AASB 16 from AASB 117.

Corporate accounting
Module Number

Table of Contents
Introduction...........................................................................................................................................1
1. From the annual report of Incitec Pivot Limited and in addition, to providing examples identify and
describe the accounting concepts used...................................................................................................1
2. What changes have been incorporated in the new accounting standard for lease AASB 16? Using
Incitec Pivot Limited and discuss the issue with examples....................................................................3
3. Summarise the key disclosures the company has made on its accounting for leases including on the
transitional provision and effect of the transition to AASB 16 from AASB 117...................................4
References.............................................................................................................................................6

Introduction
With the changes in economic, various accounting frameworks have been developed to set up
harmonisation in the domestic and international reporting framework. International
Accounting Standards Board has been working since long to rationalise the accounting
pattern followed by different nations to raise financial homogeneousness and comparability.
A milestone achieved by IASB in this line is introduction of IFRSs. IFRS for leases has also
been introduced. In this report, implication of the lease accounting standards with the
implication of the Incitec Pivot Limited has been taken into consideration. Based on the
requirements mentioned in this IFRS, the AASB of Australia has replaced its “AASB 117,
Leases”. In place, a new standard AASB 16 is announced. The changes in the accounting and
disclosure list brought by this new standard are discussed in the current assignment. Incitec
Pivot Limited, listed on ASX is chosen for AASB 16’s analysis purpose. In addition, the
basic accounting concepts applied by Incitec Pivot Limited are also studied.
1. From the annual report of Incitec Pivot Limited and in addition, to providing
examples identify and describe the accounting concepts used.
The basic accounting concepts applied while preparing the financial statements by Incitec
pivot limited are as follows:
 Money measurement concept: this accounting concept lays the basic requirement for
transactions to be accounted in organisation’s financial statements. Only those business
activities which can be translated in monetary activities are recorded while preparing
financials. All those business activities which does not involve money or money in kind
inflow or outflow are ignored (Carey, Knowles, and Towers-Clark, 2017).
E.g. Incitec Pivot Limited has account employee benefit expenses which involved cash or
kind outflow from organisation. But for all the activities where employees were just rewarded
with “words of appreciation” are not recorded in financial statements of business.
 Accounting period concept: even when the business is supposed to be running for an
indefinite term, yet the financial results are required to be gathered for a specific duration.
This duration has to be similar always. This time frame is termed as accounting period. Every
business is supposed to compute and disclose financial results for an accounting period. This
enhances performance comparison and helps in understanding performance patterns.

E.g. Incitec Pivot Limited follows 1st October to 30th September every year to be its financial
year. The company’s audit report, director’s report and financial reports all concern to this
particular financial period every year.
 Dual aspect concept: any financial transaction can only be made part of entity’s financials, if
it satiates the equation of accounting, i.e. “Assets – Liabilities = equity/capital”. Whenever
business performs an accounting transaction, it is bound to impact business in two ways. On
one end some benefit comes to the organisation or liability settles and on another an outflow
is witnessed. Hence, every transactions impact business in two folded manner.
E.g. purchase of line items under property, plant and equipment by Incitec Pivot Limited
causes inflow of economic benefit in form of a tangible asset possession, while outflow in the
form of decline in cash resources.
 Business entity concept: This concept segregates the identity of organisation from the
identity of its owners. The transactions effected by business owners on their personal end
shall not impact business’s financials and vice versa. The financial accounts of both the
business and owners are separate and cannot be grouped.
E.g. Incitec Pivot Limited’s shareholders are the real owners of the company. However, if
any shareholder, say named XYZ has some personal loan liability of amount $5 million, and
he is declared insolvent, neither the bank, not the creditors could sue Incitec Pivot Limited in
any which manner. Insolvency of XYZ has no unfavourable implication on treasury of Incitec
Pivot Limited.
 Consistency: the accounting policies and judgements applied by an organisation while
preparing financial statements are assumed to be applied by them in preparation of financials
for every accounting period without any modification. However, modifications can be made
if required by law, or is necessary to present financials with a better approach.
E.g. Incitec Pivot Limited depreciates the property, plant and equipment since their
acquisition using method of straight line depreciation. However, if in some year it wishes to
switch to written down value method, the same is not allowed, unless Incitec can reasonably
prove it was inevitable to do so.
 Historical cost method: the recording of business assets is done by organisation on the price
paid to purchase them, inclusive of allowed expenses. The allowed expenses include
installation fees, delivery charges, freight paid, etc. Fair value accounting can be used
afterwards in revaluing the assets. Items being valued at fair value as exception to this
accounting concept need to be mentioned expressively by management (Scapens, 2016).

E.g. Incitec Pivot Limited has used historical cost methodology for recording the business
assets initially in the financial statements. The assets recorded in exception to this method are
financial instruments. Fair value accounting has been used to value those assets. Hence, in the
annual report, the use of historical costing and places where it is not followed is expressively
declared by Incitec’s management.
2. What changes have been incorporated in the new accounting standard for lease
AASB 16? Using Incitec Pivot Limited and discuss the issue with examples.
The AASB 16, Leases have been issued in Australia by AASB in accordance with the
accounting model mandatorily set for leases by IFRS 16, Leases. The new standard
revolutionised lease accounting. Not only Incitec Pivot Limited, but almost every listed entity
in Australia is going to be impacted by these changes as leasing arrangements are too
pervasive. Every component forming the set of financial statements is going to feel the
impact. The impact of these changes is more likely to affect the lessee entities and not the
lessor. The new standard is way different as compared to the older standard on leases and
these changes could be summarised as follows:
 The balance sheet prepared as per the new standard AASB 16, Leases are likely to expand in
terms of assets and liabilities recorded. The line of difference separating lease arrangements
into operating and finance leases has been removed. Now for all the lease arrangements
which exceed 12 months’ period shall be categorised and treated in a similar manner.
The balance sheet shall reflect a “lease liability” on the liability side and with the same
amount a “right-of-use” asset on the asset side. The value attributed to these two accounts
shall be equivalent to the total of present value computed for all the lease payments made on
non-cancellable basis (Joubert, Garvie, and Parle, 2017).
 In case an organisation applies the AASB 16 using retrospective method, the transitional
period shall accommodate larger changes. For the year of initial recognition the value
assigned to right-of-use asset and lease liability might differ. The difference is on account of
usage of different discount rates. The resultant difference hence shall be adjusted in the
retained earnings balance (Xu, Davidson, and Cheong, 2017).
 The treatment of lease payments is also changed. Earlier the interest charged on the lease
payments on operating leases were qualified to be operating expenses. However, with AASB
16, these lease payments are to be accounted as financial expenses. The lease is a financial

arrangements and the payment shall be categorised like interest expense (Brumm, and Liu,
2019).
 However, the right-of-use asset too has to be reduced like any other tangible non-current
asset is. Amortisation or depreciation charge shall be charged to reduce the net profits
reflected by the statement of comprehensive income. This treatment is for lessees. For
lessors, the equivalent of amortisation shall be recognised as cost of inventory component
(Dakis, 2016).
 The lease payments too are categorised differently. As there are no separate operating and
finance leases, the lease payments on every lease arrangement shall be treated in a similar
manner. In the cash flow statement, the lease payments shall now be shown as a payment
made as finance activity, and not under operating activities.
CHANGES INCORPORATED AS PER AASB 16 BY INCITEC PIVOT LIMITED
Incitec Pivot Limited has not yet applied AASB 16, leases. The company intends to apply
this accounting standard in their financial statements for financial year ending on 30th
September 2020. Hence, the company as did not want to early apply AASB 16, the
comparative financial statements too have not been restated using retrospective approach.
Resultant, discussion cannot be made in relation to changes as affected due to application of
AASB 16, Leases. However, Incitec Pivot Limited mentions in their annual report regarding
the potential changes that are expected. The group’s disclosed non-cancellable commitments
in lease amount to $241.5 million. As a result of application of AASB 16 in near future, the
present value of these lease commitments shall be computed.
The amount of the present value shall be recorded as lease liability as well as right-of-use
asset in balance sheet of Incitec Pivot Limited. Also, most of the operating lease
arrangements entered by organisation shall expire before the standard is initially applied.
Hence, major retrospective restatements are not expected.
3. Summarise the key disclosures the company has made on its accounting for leases
including on the transitional provision and effect of the transition to AASB 16 from
AASB 117
The extent of disclosures necessary to be made on application of AAB 16 has widened. Now
companies have to disclose about the transitional provisions, effect of transition and general

disclosures altogether in the initial adoption year. The list of disclosures along with the one’s
reflected in Incitec Pivot Limited’s annual report are as follows:
 The date on which AASB 16 has been adopted from (Lloyd, 2016).
Incitec Pivot has not yet adopted this standard. However, the annual report discloses the
expected year of adoption to be the financial year as will end on 30th September 2020.
 The manner of lease accounting before the AASB 16 was implemented and after its
implementation.
Incitec Pivot has reported this information in the annual report. Earlier and till the
implementation of AASB 16, entity shall classify the financial and operating leases. But with
application of new accounting policies the classification is no longer required. Every lease
exceeding 12 months arrangement shall now be recorded both in assets and liabilities as
right-of-use asset and lease liability respectively.
 The impact of change of standard in quantified terms is mandatorily disclosed (Osei, 2017).
As Incitec Pivot has not yet applied AAS 16, Leases, they have not disclosed the amount
which shall be the present value of their $241.5 million of lease commitments of non-
cancellable nature. However, it is clearly mentioned that the present value of this amount
shall be recorded as lease liability and right-of-use asset. Also if any difference would be
observed in both the amounts, it shall be adjusted with the help of retained earnings.
 Details about any exemption availed on short-term leases.
 Details providing reasons behind visible difference between the amount of lease liabilities
and right-of-use assets.
 Complete disclosure of significant management’s judgements and use of estimates. If
possible, then disclosure has to be involving quantified results (de Albuquerque, et al. 2017).
 The individual details for each leased asset, comprising of the depreciation method, rate
applicable, lease term, treatment of depreciation etc.

Conclusion
After assessing the annual report, it has been considered that Incitec Pivot has reported this
information in the annual report and till the implementation of AASB 16, entity shall classify
the financial and operating leases. However, the amount of the present value shall be
recorded as lease liability as well as right-of-use asset in balance sheet of Incitec Pivot
Limited

References
Brumm, L. and Liu, J., 2019. New leasing accounting standard. Taxation in Australia, 53(8), p.449.
Carey, M., Knowles, C. and Towers-Clark, J., 2017. Accounting: a smart approach. Oxford
University Press.
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
de Albuquerque, F.H.F., Marcelino, M.M., Rodrigues, N.M.B. and de Almeida Cariano, A.J.R.,
2017. Accounting for lease transactions: analysis of possible lobbying in the issuing of IFRS
16. Revista de Educação e Pesquisa em Contabilidade, 11(4).
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.
Lloyd, S., 2016. A new lease of life. Investor Perspectives.
Osei, E., 2017. THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB), AND THE
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) SINGS SIMILAR
TUNE: COMPARING THE ACCOUNTING TREATMENT OF NEW IFRS 16 WITH THE
IAS 17, AND THE NEW FASB MODEL ON LEASES. Journal of Theoretical Accounting
Research, 13(1).
Scapens, R.W., 2016. Accounting in an inflationary environment. Macmillan International Higher
Education.
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.