AASB 16: Impacts on Speedcast International Limited

This report discusses the impacts of AASB 16 on Speedcast International Limited, a company listed on the ASX. It covers the changes in lease reporting, the effects on the company's financial statements, and the implications for stakeholders.

MASTER OF ACCOUNTING
[Year]

AASB 16
Executive Summary
IFRS 16 is the new accounting standard that has been into action and is known as the AASB 16 Leases in Australia.
The new standard is expected to bring in trillion however, will be accompanied with huge complexities. The present
report will shed light on AASB 16 and will focus on the company Speedcast International Limited that is listed on
the ASX.
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AASB 16
Contents
Introduction.................................................................................................................................................3
Speedcast International Limited..................................................................................................................3
Impacts of AASB16 on the company Speed cast international limited........................................................4
Agree with the changes in lease reporting and its Impacts..........................................................................4
Conclusion...................................................................................................................................................7
References...................................................................................................................................................8
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AASB 16
Introduction
The main focus of AASB 16 is to recognize the recognition, measurement, and disclosure of every kind of long term
leases in the financial statements of a company. This standard requires the lessee to recognize the lease assets and its
corresponding liabilities in its financial statements. The AASB 16 will be applicable for the reporting period starting
from 1st January 2019 onwards. Before the introduction of AASB 16, the lease arrangements of the company were
shown as off-balance sheet items which were hindering the transparency of financial statements of the business.
Hence, in order to inculcate transparency, changes were made and AASB 16 has been introduced. Now, the
difference between the operating lease and finance lease shall be eliminated and shall be shown as balance sheet
items only.
Now, the lessee has to show the leased asset as a Right-of-use (ROU) Asset by capitalizing the future operating
lease payments and the liability to pay those lease payments will be shown on the liability side in the balance sheet.
Further, the depreciation of the leased asset will be charged and shown in the income statement along with the
interest in the lease liability (BDO, 2016).
Speedcast International Limited
In this report, the Annual Report of Speedcast International Limited for the year ending 2018 which is listed on the
Australian Stock Exchange with regard to the Lease undertaken by the company. As the company has lease
operations therefore, the selection of the company is done. The company has taken on lease a few of its office
premises under operating leases which are non- cancellable. This means even if the company does not want to
continue with the lease arrangement, it can’t withdraw from the lease and shall be liable to pay the lease rents. The
term of such lease is average 1 to 5 years. The lease expenditure has been charged in the consolidated profit and loss
statement. At the year-end, the company had total outstanding commitments of non-cancellable operating lease
payments for US$ 62,295,000 (Speedcast International Ltd, 2018).
Further, the company also has finance lease obligations, the outstanding payments for which have been shown in the
Consolidated Balance Sheet as Obligations under Finance Leases under the head Trade and Other Payables. So it
can be very well seen that the company has an exposure to both types of lease (Williams, 2012).
Before the introduction of AASB 16, the lease was classified under two heads- Operating Lease and Finance Lease.
Under an operating lease, a substantial portion of rewards and risks of ownership of leased asset lies with the lessor
(Damodaran, 2012). The lease payments are distributed over the lease period on a straight line basis and shown in
the Consolidated Statement of Profit and Loss. Hence this way entire liability of lease payment was not recognized
in the Balance Sheet.
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AASB 16
All leases other than operating lease are financed leases. Under the finance leases, the lease amount is capitalized at
the commencement of lease period at lower of the fair value of a leased asset or present value of minimum lease
payments. However, a finance lease is not so popular among the companies (Deloitte, 2018)
Impacts of AASB16 on the company Speed cast international limited
The company has both operating and finance lease agreements so the introduction of the standard is significantly
impacting the company. Now as AASB 16 has eliminated the difference between recognition of operating and
finance lease, this would have an impact on the reporting of leases in all those companies including this company
where there are both operating and finance lease and especially operating leases (Speedcast International Ltd, 2018).
Following are the estimated impacts that will be there on the above-mentioned company Speedcast International
Limited:
The value of total assets and the value of total liabilities in the balance sheet shall increase as the present fair value
of future lease payments will be recorded as a liability and the corresponding asset that is right to use of asset will
also be shown on the assets side (KMPG, 2016). The leased asset will be capitalized and will be reduced yearly on a
straight line basis. Hence an equal proportion will be reduced from the capitalized assets amount whereas; the
liability amount will be reduced as per the payments of principal amounts (KMPG, 2016). Hence there will be a
large decrease in the company’s net assets. The assets and liability of lease shall be reduced. There will be an
increase in the operating cash inflows as the payment of the principal amount of lease will be shown under the head
Financing Activities. The interest expenses in the Consolidated Profit and Loss account are expected to rise as the
interest on lease payments. As the outstanding amount of lease will be reduced as per written down value method,
the interest portion shall be higher in initial years and lower in the later years (Speedcast International Ltd, 2018).
The company will now have to disclose all its leases in the financial statements only. The operating leases were
earlier being shown as off-balance sheet items. Hence, this is one of the new rules that comes to the forefront. The
changes in the recognition criteria will also lead to changes in the profitability and other related ratios like N.P ratio,
Net Leverage Ratio, and other such ratios. There will be a decline in N.P Ratio due to an increase in the interest on
lease and depreciation on a leased asset in the Income Statement. There will be an increase in the Net Leverage
Ratio due to increased lease payables in the balance sheet (Libby, Libby & short, 2012). Other ratios like interest
coverage ratio and EPS will decrease with increased expenses and decreased net profits. The profits of the company
will be significantly will be low in the initial years of lease payments as compared to the later years of the lease
period. However, this method is more suited to the company with a good financial health. It is therefore imperative
that the company should be sound and operations should be good so as to have a strong hold in this segment
(Vengadasalam , 2018).
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AASB 16
Agree with the changes in lease reporting and its Impacts
As the company is majorly a communication networks company providing its client's high-class networks across the
globe it is most likely that the company might own each and every fixed asset to the company shall definitely resort
to the leasing of assets mostly for remote areas. The company has its presence in more than 140 countries and ever
so counting ahead with a variety of businesses. So the company shall benefit with the introduction of this standard.
This standard will help the company in the long run. The company shall experience higher outflows of funds in the
initial years of a lease period and higher tax savings (Melville, 2013). As the Lease asset that is ROU asset shall
incur depreciation on the same and also lease interest chargeable in Profit & Loss Account of the company. Every
such company in the industry will have similar impacts.
The changed standard AASB 16 had been introduced due to the reason that earlier the lease accounting rules
classified the leases into two types- operating lease and finance lease. In the case of operating lease, the companies
were not required to show the operating lease amounts in the balance sheet and were shown as off-balance sheet
items. This reduced the transparency of financial statements for the users as the operating lease amounts were shown
only in the notes to accounts and were not included in the balance sheet. The users of financial statements were not
able to see the impact of lease payments in the business (OHM, 2018). Now after the introduction of AASB 16, they
can evaluate the corresponding liability of lease and asset in the balance sheet. Hence the required changes were
made in the leasing standards. Now, the lessee has to show the leased asset as a Right-of-use (ROU) Asset by
capitalizing the future operating lease payments and the liability to pay those lease payments will be shown on the
liability side in the balance sheet. Further, the depreciation of the leased asset will be charged and shown in the
income statement along with the interest on the lease liability.
There will be a reduction in the net incomes due to the reason that the interest expense in the income statement and
depreciation of the leased asset will be shown as expenses in the income statement. This reduction in net profit shall
affect the shareholders of the company because of the reduction in the distributable profits. The earnings per share
will also be reduced (BDO, 2016). The new standard AASB 16 will also affect all the financial & operational ratios
such as gearing ratios or net leverage ratios, current ratio, asset turnover ratio, interest coverage, net profit/ margin
ratio. Some ratios may initially go down but shall gradually have a favorable effect on the financial health of the
company. In the long term perspective the company will gain a paramount advantage owing to the lease. Further, the
changes in the standard will have a positive effect on the stakeholders of the company such as shareholders,
investors, government agencies, employees, financial institutions, etc. also there will be changes in the credit ratings,
borrowing rates, net assets values, Annual reports, earnings & dividends per share of the company which directly or
indirectly affects the total preview of the company in the eyes of its stakeholders (OHM, 2018). The implementation
of the new standard will also substantially increase the total expenses of the lessee company as the lease rentals will
be taken over by interest on the liability on the leased asset taken and also the depreciation on the right to use (ROU)
assets on a straight-line basis (AASB, 2016). The assets with larger lease value and lesser asset life will have a
greater impact on the balance sheet, as the interest and depreciation shall be higher for such assets. When the bigger
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AASB 16
assets are involved in the case it will tend to inflate the expenses and the depreciation. This will lead to a major
change in the balance sheet.
The company stakeholders will now be able to see the bigger picture and can have a better understanding of the
financial statements. The management of the companies can now no longer hide against their lease commitments.
On the other hand, the companies with higher net profits will be able to gain tax benefits as they can now charge
depreciation and interest both from their profit & loss account. The company due to reduced cash flows will no
longer be able to declare higher dividends to its shareholders. It needs to be noted that the presence of this
mechanism will lead to curtail of the dividend of the company (AASB, 2016). Hence, the shareholders will be vastly
impacted because they won’t be able to fetch return in the form of dividends. This might tend to create difficulties
for the related parties as the burden on the company will lead to disturbance in the dividend payment.
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AASB 16
Conclusion
The companies directly impacting by these standards AASB 16 shall now be able to show a clearer picture of their
lease arrangements. The treatment shall be more than disclosure and rather a full exposure on the financial
statements have to be shown by the management and the opinion by the auditor. The long term benefits of this
standard AASB 16 are immense and will help in any window dressing of accounts by the companies. This shall also
harmonize the lease treatment across the companies.
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AASB 16
References
AASB. (2016). Leases. Retrieved from http://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf
BDO. (2016). New leases standard requires virtually all leases to be capitalised on the balance sheet, Retrieved
from https://www.bdo.com.au/en-au/accounting-news/accounting-news-february-2016/new-leases-standard
Damodaran, A. (2012). Investment Valuation. New York: John Wiley & Sons.
Deloitte. (2018). Leases: A guide to AASB 16. Retrieved from
https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-aasb-16-guide-
220916.pdf
KMPG. (2016). AASB 16: A fundamental overhaul of lessee accounting effective 2019, Retrieved from
https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-fundamental-overhaul-lessee-
accounting.html
Libby, R., Libby, P & Short, D. (2012). Financial accounting. New York: McGraw-Hill/Irwin.
Melville, A. (2013). International Financial Reporting – A Practical Guide. 4th edition, Pearson, Education
Limited, UK
OHM, M. (2018). New Leasing Standard AAB 16. Retrieved from https://www.hlb.com.au/new-leasing-standard-
aasb-16-brings-significant-impacts/
Speedcast International Ltd. (2018). Speedcast International Ltd Annual Report & Accounts 2018. Retrieved from
https://www.speedcast.com/pubs/Speedcast_2017_Annual_Report.pdf
Vengadasalam , V. (2018). AASB 16 New Lease Standard: 1st January 2019 is coming. Retrieved from
https://www.accru.com/2018/10/aasb-16-new-lease-standard/
Williams, J. (2012). Financial accounting. New York: McGraw-Hill/Irwin.
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