IFRS 16 Impact on AAC's Financial Statements

The assignment discusses the application of IFRS 16, a new accounting standard for leases, to AAC's (Australian Agricultural Company) financial statements. It explores how the company will be required to report all leases on the balance sheet, including off-balance sheet leases with time periods exceeding 12 months or low-value assets. The assignment also touches upon other commitments and contingencies, such as purchase contracts and native title claims affecting AAC's cattle properties. The analysis aims to understand the implications of IFRS 16 on AAC's financial position and net profit.

RUNNING HEAD: INTEGRATED ACCOUNTING
Integrated Accounting

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Part A
1. The market value adjustment of biological assets valued by Australian Agriculture
Company (AAC), reflect the Cattle fair value adjustments. In the annual report of
AAC, this item is recognized as revenue and is recorded in the income statement1.
The calculation of the amount is done as per the AASB132. Referring to note A3, as a
biological asset, AASB 141 agriculture, values the livestock at fair values all the
times, prior to sales and harvest. The movements in the price and external factors
helps in determining the fair value. It can been seen from the annual report that the
cattle fair value adjustments has increased over the year. Reason being rise in the
value of herd. The adjustments also include a term biological transformation which,
according to AASB 141, includes reclassification of an animal as it goes through the
whole process of becoming a trading animal and then it ages and become less
valuable3.
Making fair value adjustments brings benefits to AAC as they are recognized as
unrealised assets, which supported income statement to show a profit. In 2017, they
are reported at $300,026,0004.
2. The item ‘Change in fair value of property’ reflects the realisation value of the
property held by AAC. In the company’s annual report, it is mentioned that the
property is valued independently by the valuers CBRE. They determine the fair value
by using the market based direct comparison method. However, as per the AAC
1 AACo, Annual Reports (2017) <https://aaco.com.au/investors-media/annual-reports>.
2 Aasb.gov.au, Fair Value Measurement (2015)
<http://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf>.
3 Aasb.gov.au, Agriculture (2015) <http://www.aasb.gov.au/admin/file/content105/c9/AASB141_08-15.pdf>.
4 At 1.

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report pg. 59, directors determined the fair value with reference to the work of
independent valuers and market based evidences. The item affected both the income
statement and balance sheet. The calculation is done by analysing the comparable
sales and some external factors such as location, size and many more5. According to
the director’s report, the change in fair value of property, plant and equipment shows
an increase of $2.3 million in the value of property, as compare to the $6.2 million
increase in the prior corresponding period. The increase is recorded on the balance
sheet of the company and as an expense in the income statement before EBITA6.
3. Net profit after tax is basically an income calculated by deducting cost of goods sold,
operating expenses, depreciation, interest expense and taxes from the total revenue
earned during the year. This item is also shown in the cash flow statement under the
head ‘cash flow from operating activities’. The figure is shown in the income
statement which is usually the first item displayed in the cash flow statement on the
top7.
Net cash flow from operating activities represented the cash generated by the
company from its operations. It is the sum of net profit after tax, adjustments made for
the non-cash expenses and changes in working capital8. The difference between the
figures of these two items is due to their accounting treatment. In income statement,
net profit calculation includes all noncash expenses whereas such figures do not
reduce the amount of cash, therefore they are added back to the net income to derive
at the operating cash flow. Similarly, changes in assets and liabilities are not
considered while determining net profit but the same is taken into account at time of
calculating cash flow from operating activities.
5 Ibid.
6 Ibid.
7 Mike Bazley, Phil Hancock and Peter Robinson, Contemporary Accounting (Cengage Learning, 2014).
8 At 6.

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Part B
1. Livestock is been shown on the balance sheet under the head ‘current assets’ at
$269,850 and also under ‘non-current assets’ at $392,632. According to the note A3,
the accounting policies related to livestock states that AAC measured this item at fair
value less cost of sales. Sales cost include all the cost required for selling the assets,
including freight charges9. According to AASB 141, livestock is valued at fair value
and once the fair value of biological assets become measurable, the company
recognized it at the fair value less cost to sell. In addition to this, if a non-current
biological asset meet the conditions of AASB 5 ‘Non-current Assets Held for sale and
Discontinued Operations’, then it is assumed that fair value is measurable reliably10.
2. Referring to note A4, the accounting policies for property, plant and equipment, apart
from industrial plant and equipment, all are recorded at revalued amount. The amount
is the fair value at the date of revaluation less accumulated depreciation and
impairment losses. The increment at time of revaluation is been credited to asset
revaluation reserve reported under equity section on the balance sheet. All the lump-
sum payments related to pastoral and perpetual property leases are classified as land.
In addition to this, the industrial land and buildings are reported at historical cost
which includes cost of replacing parts. Accumulated depreciation and impairment
losses are deducted11. As per the pg. 83 of the annual report, depreciation is calculated
on straight line method. It is also mentioned on the same page that a property, plant
and equipment is derecognized, when it is disposed or when it does not derive any
future economic benefits. Any gain or loss on derecognition is included in the income
9 Ibid. 2.
10 Aasb.gov.au, Non-current Assets Held for Sale and Discontinued Operations (2015)
<http://www.aasb.gov.au/admin/file/content105/c9/AASB5_08-15.pdf>.
11 Ibid. 2.

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statement at the time when the asset is derecognized. The gain or loss is calculated by
subtracting the carrying amount from the net disposal proceeds12.
3. Borrowings under non-current liabilities comprises of obligations related to financial
leases, secured bank loan facility and convertible notes. In 2017, they are at
$362,918,000 which is less than that of in 2016. As per the note C1, AAC has taken
Facility A and Facility B loans which are to be paid on June 30, 2018. The interest is
been charged at the applicable rate of BBSY + Margin. Financial facilities are also
provided on secured basis, keeping fixed and floating assets as security.
AAC issued 160 convertible notes to one of its existing shareholder for $80 million
under a deed. They are unsecured and subordinated to the senior bank debt of the
company. The face value of the notes is $50,500,000 and the coupon rate is 6 months
BBSW rate plus 0.15% subject to a floor of 3% per annum13. The value of the notes is
the sum of its face value, accumulated amortisation less capitalized costs, fair value of
the interest rate and value of other equity securities.
Part C
1. Under, Note to Financial Statements, E1 and E2 includes those commitments and
contingencies which are defined as unrecognized items in the annual report of AAC.
In note E1, an item named as future minimum lease payments related to non-
cancellable operating leases is shown with an amount of $7,718,000, made up of
various time periods. As these are unrecognized items so they are not reported on the
balance sheet of the company. According to the old standards of leases, ACC report
these lease obligations off balance sheet, which means it is not necessary to show
these payments as liability in a statement of financial position. Instead the operating
leases are recorded under notes. So none of the financial statement is been affected.
12 Ibid. 2.
13 Ibid. 2.

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2. IFRS 16 is the new reporting standard which will replace the IAS 17 Leases, with
effect from 1 January 2019. Under this new standard, the companies are been obliged
to follow a single lessee model, which requires the recognition of assets and liabilities
for all the leases except the one which has the term period of less than 12 months or
the value of underlying asset is very low. This means that the Lessee cannot classify
the leases as operating and financial14. They are required to report all the leases on the
balance sheet. In case of AAC, the company needs to report its off-balance sheet
leases having a time period of more than 1 year, on the balance sheet. This will surely
affect the value of its assets and liabilities. In 2017, it has two non-cancellable
operating leases amounted to $4,545,000 and $202,000 which are been recorded
under notes to financial statements. Once the IFRS 16 becomes effective, ACC has to
record these two lease payments on its balance sheet. It will eventually increase its
liabilities and affect its financial position. Net profit can also get affected. However,
the companies who has applied for IFRS 15 Revenue from Contract with Customers
can apply IFRS 16 to their business before its effective date. In addition to this, other
future lease payments for motor vehicle and equipment finance which are not
recognized also has to be reported on the balance sheet15.
3. Other commitments and contingencies include the information about the
commitments made by AAC and the contingencies that have been occurred in 2017.
As per note E1, AAC has a purchase contract of $14,065,000 of grain commodities
and $42,801,000 of cattle as on 31st March 2017. The time period of the contract is 12
months from the balance date. A capital expenditure related to the property, plant and
equipment is also contracted.
14 Iasplus.com, IFRS 16 — Leases (2018) <https://www.iasplus.com/en/standards/ifrs/ifrs-16>.
15 Pwc.com, IFRS 16: The leases standard is changing. Are you ready? (2016)
<https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf>.

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Note number E2 represents the contingency which is about the native title claims put
on some of the AAC’s cattle properties. Discussions with the stakeholders are been
there regarding the same and company claims that there is no native title rights found
to co-exist with their rights. Also it is expected that it would not have any impact on
the business and its growth16.
Bibliography
Books
16 Ibid. 2.

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Bazley, Mike, Phil Hancock and Peter Robinson, Contemporary Accounting. (Cengage
Learning, 2014).
Websites
AACo, Annual Reports (2017) <https://aaco.com.au/investors-media/annual-reports>.
Aasb.gov.au, Agriculture (2015)
<http://www.aasb.gov.au/admin/file/content105/c9/AASB141_08-15.pdf>.
Aasb.gov.au, Fair Value Measurement (2015)
<http://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf>.
Aasb.gov.au, Non-current Assets Held for Sale and Discontinued Operations (2015)
<http://www.aasb.gov.au/admin/file/content105/c9/AASB5_08-15.pdf>.
Iasplus.com, IFRS 16 — Leases (2018) <https://www.iasplus.com/en/standards/ifrs/ifrs-16>.
Pwc.com, IFRS 16: The leases standard is changing. Are you ready? (2016)
<https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf>