Impact of AASB 16 on Lease Financing

Leasing
Module Number-
[DATE]
Hewlett-Packard
[Company address]

Abstract
The current report has been presented to critically evaluate the new accounting
standard for lease financing being AASB 16, Leases. The reason for replacing of earlier
AASB 117 due to its drawbacks has been discussed. The provisions set by the newly
formulated standard AASB 16 are discussed in the report, with main discussion about the
effect casted on the financial statements of companies dealing significantly in lease financing.
The possible effect on the leasing habits because of change brought by the standard are also
discussed. The effect of the pronouncement of the accounting standard on the comparability
between the financial statements of companies using the lease assets and owned assets is also
conversed. In the final section the key disclosures highlighted by Woolworths Group in its
annual report in relation to the transitional provisions adopted by the company are shown.
The disclosures made by the company represent the effect of the application of the new
AASB 16 on the consolidated statement of financial position as at 24th June 2018.

Table of Contents
Abstract..........................................................................................................................1
Introduction....................................................................................................................2
Drawbacks of old accounting standard for lease, AASB 117...............................................2
Why was the change necessary.........................................................................................3
Changes incorporated by new accounting standard.............................................................3
Effect of change on companies having significant level of lease financing...........................4
In the former accounting standard for lease (AASB 117) both operating lease and finance
lease were allowed, why did companies have a tendency to classify most of the lease contract
as operating lease? How does positive accounting theory relate to this behaviour of
managers?.......................................................................................................................5
Improved comparability between the companies that lease assets and companies that borrow
to buy assets because of implementation of IFRS 16..........................................................5
Possible explanation as to why after the implementation of AASB 16, reporting entities might
be more likely to buy more assets and lease fewer assets....................................................6
The key disclosures made by Woolworths Group on its accounting for leases including on the
transitional provision and effect of the transition to AASB 16 from AASB 117....................7
Conclusion......................................................................................................................8
References......................................................................................................................9

Introduction
AASB 16, Leases has been formulated to replace the former accounting standard dealing with
leases, i.e. AASB 117. The provisions set by AASB 16 are equivalent to the provisions
marked by the IAS 17, Leases. The purpose of setting of AASB 16 is setting up of a broad
model dealing with the identification and financial statement treatment for the lease
arrangements entered by both the lessor and lessee. The provisions of the newly formed
AASB 16 are different from earlier AASB 17 and the listed entities are mandated to switch to
the new standard. Switching to the new standard requires implementation of transitional
provisions. These transitional provisions are discussed in the current report with the example
of information disclosed in the annual report of Woolworths Group.
Woolworths Group works in the retail industry and is headquartered in Bella Vista, in New
South Wales Australia. The company is named as second largest Australian corporation in
terms of revenue. The group is known in Australia mainly for the super market chain it
operates therein.
Drawbacks of old accounting standard for lease, AASB 117
The main drawbacks of the earlier applicable AASB 117, Leases dealing with accounting of
leases are listed in the following sections. These drawbacks framed a major criterion for the
authorities to replace the AASB 117 with AASB 16.
 The state of financial statements was misrepresented when AASB 117 was applicable. The
financial statements only represented the lease liabilities and right-to-use assets in case of
finance leases earlier. The reporting of operating leases was limited to note to accounts. The
liability in case of operating leases was only shown in notes and hence remained unread by
most readers. The financial statements hence lacked transparency then.
 The lessee companies shall be now required to fully disclose all the lease liabilities in the
balance sheet, which earlier were only informed about in the notes to financial statements. It
may result to issues in complying with the domestic and international reporting frameworks.
 Due to the application of AASB 117, most of the lessee companies having large lease
portfolios opted for classifying their most of the leases as operating leases to remain safe
from disclosing lease liabilities in balance sheet. The classification that was actually required
for the type of lease was erroneously modified to gain advantage. This gave them the