Financial Accounting | Leasing standard - AASB 117 and AASB 16

Running head: FINANCIAL ACCOUNTING
Financial accounting
Name of the Student
Name of the University
Author Note

FINANCIAL ACCOUNTING
Table of Contents
Introduction:...............................................................................................................................2
Part 1:.........................................................................................................................................3
Outlining the reasons for replacing AASB 117 leases with AASB 16:.....................................3
Part 2:.........................................................................................................................................5
Evaluating the contract significance in leasing agreement as per AASB 16:............................5
Part 3:.........................................................................................................................................9
Identifying the impact of substantive substitution right on the agreement of lease:..................9
Conclusion:..............................................................................................................................11
References list:.........................................................................................................................12

FINANCIAL ACCOUNTING
Introduction:
The paper conducts an investigation into the introduction of new leasing standard by
replacing the existing old standard. The reason for introducing the new lease standard that is
AASB 16 and why the existing lease standard AASB 117 was replaced has been outlined in
the paper. In addition to this, paper also discusses about the significance of contract in the
agreement of lease in accordance with lease standard AASB 16. The rights of substantive
substitution has been discussed by evaluating the impact on lease agreement. The new lease
standard IFRS 16 that has been effective from 1st January, 2019 is expected to significantly
impact the financial reporting of lessee (Peprníčková 2018). Some of the arguments presented
as the critics of the new lease standard might not be necessarily valid.
Part 1:
Outlining the reasons for replacing AASB 117 leases with AASB 16:
IFRS 16 or AASB 16 has replaced the lease standard IASB 117 and the most
impactful and obvious difference is disclosure of the operating lease on the balance sheet of
the reporting entities. The account for lease by the reporting entity in their financial reporting
disclosures particularly on the income statements and balance sheet has been changed due to
the introduction of new lease standard AASB 16. The major loophole in the accounting for
lease under the existing standard AASB 117 that is operating lease which is off balance sheet
has been addressed by the introduction of the new lease standard. This loophole is closed by
the new standard as it requires all the lease accounted by the organizations to be recognized
as finance lease and disclosed on the balance sheet of the reporting entities. The need for
replacing the existing lease standard with new one was to provide the users with the true
nature of liabilities of company by avoiding any misleading facts about the financial nature. It
is so because under the old lease standard, operating lease were mentioned in the footnotes of

FINANCIAL ACCOUNTING
the financial statements of the companies and this might contribute in misleading the users
about the financial performance (Assets.kpmg 2020).
Under AASB 117, lessors were provided limited information to make financial
decision and under new standard, there is an enhanced and improved disclosure about the risk
exposure of lessor and specifically to residual value risk. A straight line lease expense is
reported by the companies under AASB 117 and in each period of lease, the amount of lease
expense is same. However, under new lease standard, there is reduction in the amount of
interest over the contract term and this causes the total amount of expenses pertaining to lease
to be front loaded (Forbes.com 2020).
Lease transactions under the old lease standard was accounted either as the operating
or finance lease depending upon the complex test and rules and using bright lines that
resulted in nothing or all being recognized on the balance sheet. Earlier, the big ticket assets
such as manufacturing equipment’s, real estate, technology, ships, trains and aircraft was not
affected and the new lease standard created an impact on such assets. The expense character
under new standard would change along with decreasing capital ratios and increasing gearing
ratios would cause balance sheet to grow. The comparative figures is not required to be
restated under the transition approach and the new lease liability is measured at the
incremental borrowing rate of agency by discounting the remaining lease payments (Yu
2019).
Lessee under the old lease standard are not required to classify their operating lease
into assets and liabilities and disclose it on the financial statement that is balance sheet. Such
practice has resulted in providing the users with incomplete and inaccurate information of the
expenses and results in overestimations due to making estimate of the off balance sheet
obligations. Moreover, comparing the business with those buying assets and using lease