Impact of IFRS 16 on ASG Group Ltd

This assignment examines the effects of implementing International Financial Reporting Standard (IFRS) 16, 'Leases,' on ASG Group Ltd. It analyzes how the new standard impacts the company's balance sheet, debt levels, and interest costs due to its heavy reliance on operating leases. The assignment also outlines an action plan for ASG Group Ltd to comply with IFRS 16 and AASB 16 by January 1, 2019. It includes a thorough evaluation of the new accounting model's implications for the company's financial reporting.

Critical Thinking

Table of Contents
ANALYSES.....................................................................................................................................1
RESEARCH.....................................................................................................................................1
EVALUATE & ANSWER..............................................................................................................2
REFERENCES................................................................................................................................3

ANALYSES
By the given case the company which have been reviewed is ASG Group Ltd that relies
on operating leases and company disclose the transaction of $1.2 million on balance sheet under
AASB 117. As per AASB 16 (IFRS 16) which shows company leases in January 2016 and will
be effective from 1st January 2019 in Australia. The standards mandate that companies are
required to show majority of operating leases on balance sheet with a single accounting model.
They are accounted for right-of-use (ROU) of assets and liabilities that aid in creating more
transparency about company financial metrics such as EBITDA and asset turnover ratios.
RESEARCH
By using AREA framework of accounting, relevant facts and evidence identified are
provided below:
 Assessing Fact Patterns: As per Australian Accounting Standard Board (AASB 16)
requires ASG Group Ltd to disclose the transaction of operating lease in the balance sheet
of company. International Financial Reporting Standards (IFRS 16) states to measure,
recognise, present and discloses operating lease (Everything you need to prepare for
IFRS 16, 2017). As per accounting standards of Australia, operating lease is expected to
show financial data and also asses and manage the impact credit rating, tax effected
accounting and leasing strategy. For instance, in ASG group, the financial lease and
operating lease that were shown under balance sheet of the company in 2016 was
respectively $1.2 million and $4.2 million; and in 2015 was $2 million and $1.1 million.
This implies that the increment in operating lease as the company discloses all the
transactions regarding operating and financial leases which are allowed by AASB 117
(FY2016 Financial Results. 2017).
 Regulatory and Legal Accounting Requirements: As per IFRS 16 only small leases
are expected to be exempted from the clause. But ASG Group Ltd relies on operating
leases at the moment. Then from 1st January 2019 according to Australian Accounting
Standard Board 16 (AASB16), it will be mandatory to show all the transaction based on
operating lease in the balance sheet of the company (ASB 16: A fundamental overhaul of
lessee accounting effective 2019. 2017). Though the company is not violating any law by
not showing operating leases in balance sheet, as IFRS 16 will come into effect on 1st
January 2019.
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 Ethical Dilemma: It will be the moral duty of ASG Group Ltd to display transactions
regarding operating lease as per AASB 16 (IFRS 16) from 1st January 2019. With single
accounting model, operating leases recognised off-balance sheet and will be accounted
for as right-of-use (ROU) (Xu and et.al, 2017). Leasing data assists in determining the
amount and geographical distribution of lease and convey the right to use of asset in
specified period.
 Action Plan: ASG Group Ltd who heavily relies on operating leases must prepare an
efficient action plan to show the operating lease in balance sheet from 1st January 2019 as
per International Financial Report Standards and Australian Accounting Standard Board
(IFRS 16 and AASB 16). The action plans should include the process and Methods
Company will use to fulfil the requirement of accounting standards (Tan‐Kantor, Abbott
and Jubb, 2017).
EVALUATE & ANSWER
Implementation of IFRS 16 and AASB 16 results in higher debts level and interest cost
for ASG Group Ltd as the company heavily relies on operating leases. There was increment of
AUD158000 of operating lease in 2016 as compared to 2015 as organisation discloses all the
transactions. It will assist in obtaining substantially all the benefits of economic and direct use of
the specific item that made available for lease under the contract. Moreover, IFRS 16 generates
future operating lease payments on balance sheet as a right-of-use (ROU). Thus, it is
recommended to company to work according to new accounting standard which will become
effective on 1st January 2019.
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REFERENCES
Books and Journals
Tan‐Kantor, A., Abbott, M. and Jubb, C., 2017. Accounting Choice and Theory in Crisis: The
Case of the Victorian Desalination Plant. Australian Accounting Review.
Xu, W., and et.al., 2017. Converting financial statements: operating to capitalised leases. Pacific
Accounting Review. 29(1). pp.34-54.
Online
AASB 16: A fundamental overhaul of lessee accounting effective 2019, 2017 [Online] Available
through:<https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-fundamental-
overhaul-lessee-accounting.html> [Accessed on 12th September 2017].
Everything you need to prepare for IFRS 16, 2017 [Online] Available
through:<https://www.intheblack.com/articles/2017/06/27/prepare-for-ifrs-16> [Accessed
on 12th September 2017].
FY2016 Financial Results, 2017 [Online] Available
through:<https://www.asggroup.com.au/fy2016-financial-results/> [Accessed on 12th
September 2017].
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