Impact of AASB 16 on Woolworths Limited

This assignment analyzes the effects of replacing AASB 116 with AASB 16 on Woolworths Limited's accounting reports. The new standard requires additional disclosure, including future lease payments and interest expenses related to ROU assets. This will negatively impact the company's net profit margin and key financial ratios. The report recommends that Woolworths Limited focus on undertaking financial leases rather than operating leases to mitigate these effects.

Financial Reporting Disclosures in the Australian
Corporate Sector
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Executive Summary
In the recent times, Australian Accounting Standard Board has introduced changes in
leasing standards AASB 16 from 117. For this report, Woolworths Limited has been selected
which operates in the retail sector of Australia. It can be summarized from the evaluation that
Woolworths Limited has followed all the leasing disclosure requirements such as AASB 117 to a
great extent. It can be inferred from the report that Woolworths Limited exhibits accounting
regarding property cost including re-measurement of onerous lease and exit cost which is to be
settled by such group. As per the new arrangement such as AASB 16 firm is obliged to present
classification regarding lease transactions in B/S and profit & loss. Further, in the context of
lessee, recognition in relation to right-of-use-assets and equivalent liabilities are needed. For
streamlining the disclosure of lease related transactions changes have been made ion AASB 117.
Along with this, by taking into account considering para from 47 to 50, lessee such as
Woolworths Limited would become able to comply with the disclosure requirement more
effectually.
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
A. Describing current lease arrangement of Woolworths Limited and presents disclosure of the
same in the financial statements as per AASB 117.....................................................................1
B. Providing summary of new rules as per AASB 16 and stating the reasons behind making
modifications in AASB 117.........................................................................................................2
C. Presenting the impact of new leasing arrangement on the financial statements and
performance of Woolworths Limited..........................................................................................3
D. Recommending ways through which accounting reports can be improved as per the new
accounting system........................................................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5
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INTRODUCTION
In Australia, AASB (Australian Accounting Standard Board) plays a vital role in
developing and maintaining rules pertaining to recording as well as disclosure of monetary
transactions. Australian firms listed on S&P ASX 300 follow rules of AASB and IFRS while
preparing as well as presenting financial reports to the stakeholders. The present report is based
on Woolworths Limited which is one of the leading retail firms of Australia and listed on
recognized stock exchange such as S&P. In this, report will provide deeper insight about the
accounting standards related to leasing arrangement such as AASB 16. It also highlights the
reasons behind making changes in AASB 117.
MAIN BODY
A. Describing current lease arrangement of Woolworths Limited and presents disclosure of the
same in the financial statements as per AASB 117
Annual report of Woolworths Limited related to the year 2017 shows that company has
complied with the disclosure requirements such as AASB 117 significantly. Hence, in this, leases
are classified as financial which in turn accounts for $2.3 million. On the basis of AASB 117, all
the risks and rewards associated with the leased assets are transferred to lessee (Compiled AASB
Standard 117, 2017). Further, financial report of Woolworths Limited entails that operating lease
payments accounted for $2034.3 m that treated as an expense over the lease term on the basis of
straight line. Along with this, it has assessed that fixed rate increases rental payments regarding
lease to the significant level.
Further, assets or liability was determined on the basis of differences take place between
amounts paid and lease expenditure. Such element is brought to an account on a straight line
basis. Incentives which are related to operating lease are primarily assessed as a liability and then
considered as a part of expense. Further, accounting report of Woolworths Limited exhibits that,
accounting regarding property cost including re-measurement of onerous lease and exit cost is to
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be settled by such group. By keeping all such aspects in mind it can be depicted that leasing rules
as per AASB 117 were properly followed by Woolworths Limited.
B. Providing summary of new rules as per AASB 16 and stating the reasons behind making
modifications in AASB 117
AASB has made some modifications pertaining to lease arrangement and replaced AASB
117 from 16. According to the new rules, there is a need to determine the present value of lease
payments. Along with this, AASB 16 demands for classification regarding lease transactions in
B/S and profit & loss. As per AASB 16, effective disclosure or recognition of lease is required
on balance sheet with some specific exception. Such accounting standard will closely influence
to the companies with operating lease arrangement. Moreover, lessee will assess or record right
of use assets as well as obligation. Under AASB separate recording requirements are mentioned
for both lessor and lessee such as:
Lessors: Considering AASB 16, it can be presented that lessors need to classify leases in
the form of operating or financial. New standard exhibits that lessor needs to assess and present
the value of net investment in the consolidated statement of financial position. Here, net
investment value implies for the PV of future payments and unguaranteed residual value if any
(Guidance for AASB 16 Leases, 2017). Along with this, AASB 16 states that firm will recognize
income related to lease on straight line or other systematic basis. Leasing arrangements related to
operating aspects will be considered as assets in the balance sheet.
Lessee: New requirements show that most of the lease contracts demand for recognition
in relation to right-of-use-assets and equivalent obligation. AASB 16 offers relief when leases
are for 12 months or less than such period. Further, it is not applicable for the low value assets
such as telephone, office furniture etc.
The main reason behind making changes in ASSB 117 is to facilitate standardization in
relation to the disclosure of lease related transactions. AASB 16 which will come into effect
from January 2019 is highly aligned with IFRS 17. Further, another main objective behind
making changes in AASB 117 is to enhance transparency regarding the aspect of financial
leverage (Xu and et.al., 2017). Further, it also improves disclosure regarding the capital
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employed through bringing lease assets and liabilities. By taking into account all the above
depicted aspects it can be stated that new leasing standard or arrangement is good reform over
AASB 117.
C. Presenting the impact of new leasing arrangement on the financial statements and
performance of Woolworths Limited
By doing assessment, it has found that AASB 16 will replace and place direct impact on
the existing accounting treatment or policies, such as AASB 117, of Woolworths Limited to a
great extent. Moreover, as per the new accounting requirements leases will be classified on the
basis of nature such as either finance or operating which in turn recognized in the consolidated
statement of financial position. In accordance with AASB 16, Woolworths Limited needs to
present the value of future lease payments with the exception of short term arrangements.
Further, as per the new leasing arrangement interest expense pertaining to the related assets will
be considered as liabilities (Guidance for AASB 16 Leases, 2017). Further, depreciation charges
will also be recognized in relation to ROU assets. Thus, according to new standard, such
additional disclosure requirement will impose issue in front of Woolworths Limited. Moreover,
income statement of Woolworths Limited will be affected to a great extent due to the recording
of interest charges as an obligation. In the earlier years, depreciation and interest charges on
ROU assets are higher (Dakis, 2016). Considering such aspect, it can be stated that net profit
margin or ratio of the company will be negatively affected after the application of such new
standard.
Along with this, by doing evaluation of financial statements of Woolworths Limited it
has assessed that undiscounted operating lease obligations accounted for $24438.8 million
(Financial Report (2017) Woolworths Ltd, 2017). Hence, considering the current or new
accounting standard it can be presented that consolidated financial statements will be influenced
negatively. Moreover, it is expected that impact will materially gross-up and impacts key
financial ratios. Hence, by taking into account all the above depicted aspects it can be said that
impact of new leasing arrangement such as AASB 16 on the consolidated financial statements of
Woolworths Limited will be significant.
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D. Recommending ways through which accounting reports can be improved as per the new
accounting system
AASB 16 will impose new additional disclosure requirement of Woolworths Limited as
compared to the past one. Along with this, for maintaining the faith of investors Woolworths
Limited is obliged to follow AASB 16 from 1st July 2019. Considering the new standards or rules
it is advised to Woolworths Limited to lay emphasis on undertaking financial lease rather than
operating. Further, by evaluating or understanding all the leasing rules as per AASB 16
accountant of Woolworths Limited can prepare suitable report. By considering para from 47 to
50, lessee such as Woolworths Limited would become able to disclose all the leasing
transactions in an appropriate manner.
CONCLUSION
By summing up this report, it has been concluded that replacement of AASB 116 by
AASB 16 will closely influence the final accounts and disclosure of business organizations
including Woolworths Limited. Besides this, it can be inferred that AASB 16 will improve
leasing disclosures to the significant level. Further, it has been articulated that financial position
and performance of Woolworths Limited will be affected to some extent.
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REFERENCES
Books and Journals
Xu, W. and et.al., 2017. Converting financial statements: operating to capitalised leases. Pacific
Accounting Review, 29(1), pp.34-54.
Dakis, G. S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions. 68(2). p.99.
Online
Guidance for AASB 16 Leases. 2017. [pdf]. Available through:
<https://www.treasury.nsw.gov.au/sites/default/files/2017-04/Guidance%20for%20AASB
%2016%20Leases%20-%20New%20Lease%20Standards.pdf>.
Compiled AASB Standard 117. 2017. [pdf]. Available through:
<http://www.aasb.gov.au/admin/file/content105/c9/AASB117_07-04_COMPjun09_01-10.pdf>.
Financial Report (2017) Woolworths Ltd. 2017. [pdf]. Available through:
<https://wow2017ar.qreports.com.au/xresources/pdf/wow17ar-financial-report.pdf>.
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