Issues in Financial Reporting: AASB 16 on Accounting for Leases

This report focuses on AASB 16 on Accounting for Leases, analyzing the accounting treatment of operating lease revenue, payments, and leasehold enhancements, and recommending that Wesfarmers apply and classify the lease as per AASB 16 and make the necessary disclosures.

Running head: ISSUES IN FINANCIAL REPORTING
Issues in financial reporting
Name of the student
Name of the university
Author note

1
ISSUES IN FINANCIAL REPORTING
Table of Contents
Introduction................................................................................................................................2
Finding and analysis...................................................................................................................2
Conclusion and recommendation...............................................................................................3
References..................................................................................................................................4

2
ISSUES IN FINANCIAL REPORTING
Introduction
The main objective of the report is to focus on AASB 16 on Accounting for Leases.
The report will focus on the applicability and disclosure criteria of the standards and as
example Wesfarmers annual report for the year 2017 will be taken into consideration. AASB
16 on leases incorporates IFRS 16 for leases that are released by IASB (International
Accounting Standard Board). Main objective of this standard is to set out the criteria for
measurement, recognition, disclosure and presentation for leases. It ensures that the lessor
and lessees deliver relevant information in a way that represents the transactions faithfully
(Aasb.gov.au, 2018).
Finding and analysis
Operating lease revenue of Wesfarmers includes rentals from the sub – lease rentals
and investment properties. Rentals generated from operating lease and from preliminary
direct costs are accounted for on straight line approach over the term for lease. On the other
hand, the payments for operating lease are accounted for as expense under the income
statement on straight line method (Barone, Birt & Moya, 2014). Fixed rate of increase for
lease payments without taking into consideration the contingent or the rental increase based
on index are recorded as per straight line method over the term of lease. The liability or asset
is recognized for amount of difference between payments made and recognized lease
expenses on earnings on straight line basis. Further, the leasehold enhancements are
amortised over lease period or anticipated useful life of improvements whichever is lower.
Lease provision covers the stepped arrangement of lease for enabling the expenses of lease
that needs to be accounted as per straight line method over the term of lease (Fitó, Moya &
Orgaz, 2013). However, the actual payment of lease may differ with the amounts provided
where the alternate uses are recognized for the premises including the new tenant attraction.

3
ISSUES IN FINANCIAL REPORTING
Further, the company segregates the lease as operating lease and finance lease on the basis of
whether the company holds or not the substantially the rewards and risks associated with the
ownership. While making the assessment Wesfarmers primarily considers the ownership of
asset at the end of lease term, any options for purchase, term of lease associated with the life
of assets, present value of the future lease payments with regard to fair value of the asset
(Wesfarmers.com.au, 2018).
Conclusion and recommendation
From the above discussion it is concluded that AASB 16 on leases introduced the
accounting model for single lease and it requires that the lessee shall recognize the liabilities
and assets for all the leases with the term of greater than 12 months unless the asset is of low
value. It is found that Wesfarmers is analysing the implication of AASB 16 at present.
However, the lease commitments of the company under operating lease are treated as per the
pervious accounting standard AASB 117 and are disclosed through notes. The ongoing
classification of income statement that is stated as occupancy expenses shall be segregated
interest expenses and amortisation. Therefore, Wesfarmers is recommended to apply and
classify the lease as per AASB 16 and make the necessary disclosures.

4
ISSUES IN FINANCIAL REPORTING
References
Aasb.gov.au., 2018. [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB16_AmendStd_02-16.pdf
[Accessed 16 Jul. 2018].
Barone, E., Birt, J. and Moya, S., 2014. Lease accounting: A review of recent
literature. Accounting in Europe, 11(1), pp.35-54.
Fitó, M.À., Moya, S. and Orgaz, N., 2013. Considering the effects of operating lease
capitalization on key financial ratios. Spanish Journal of Finance and
Accounting/Revista Española de Financiación y Contabilidad, 42(159), pp.341-369.
Wesfarmers.com.au., 2018. [online] Available at:
http://www.wesfarmers.com.au/docs/default-source/reports/j000901-
ar17_interactive_final.pdf?sfvrsn=4 [Accessed 16 Jul. 2018].