Impact of AASB 16 on Lease Accounting in Australian Companies

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ACCOUNTING THEORY AND CURRENT ISSUE
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Abstract
The assignment is based on a lease, how lease accounting transactions are taken into
the books of accounts for the purpose or recording and providing the information
regarding lease assets. In old accounting standard, many drawbacks were seen that's
why new accounting standards for lease requirements is born and the initiative is taken
by the AASB to introduced new accounting standard i.e. AASB 16.
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Table of Contents
Abstract............................................................................................................................ 2
Introduction...................................................................................................................... 4
1....................................................................................................................................... 5
2....................................................................................................................................... 6
3....................................................................................................................................... 7
4....................................................................................................................................... 8
5....................................................................................................................................... 9
6..................................................................................................................................... 10
7..................................................................................................................................... 12
8..................................................................................................................................... 13
Conclusion..................................................................................................................... 14
References.....................................................................................................................15
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Introduction
The basic objective of studying on the Australian Accounting Standard Board regarding
old and new accounting lease. By studying and analyzing this report, it will help in
developing the straight and clear understanding of the topic of the accounting standard
for lease in Australia. In this assignment or report, a study is also made on the new
accounting standard for financing lease i.e. AASB 16 for Australia based company.
AASB 16 is related with new accounting lease while IAS 17 is based on old accounting
standard for lease.
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In this section of the report, here it critically evaluates the AASB 17. This refers to
understand accounting for lease.
A lease means any assets or property is given on mortgage for the purpose of some
benefits. The lease contract is used by those people or company who are indeed of
using such assets because of not having sufficient working capital in their hand or in
business to buy asset property for their use. The term lease can be understood by study
the meaning of lease. Meaning of leas means, in lease contract (written or implied) in
which one party i.e. owner of the asset permit granted to another party for the purpose
of use such asset for a definite period of time under particular conditions. Under the
lease, the owner of the asset is known as lessor and the party who use such specific
asset is known as lessee (Xu, et. al., 2017).
As per the evaluation of AASB 117 (old accounting standard for lease), it divided the
lease into two parts (operating lease and financing lease).
Operating lease: operating lease can be classified or term as an operating lease when
all the risk and rewards regarded assets are not transferred incidentally to the
ownership.
Financing lease: It can be said a financing lease when all the risk and rewards are fully
transferred to the ownership incidentally.
Following are the drawbacks that contain in AASB 117 in old accounting standard for
lease.
It classifies the overall lease into two parts i.e. operating and financing lease. This was
creating a problems situation in front of the company whether it was considered as an
operating or financing lease.
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There is a need or requirement for changing the old accounting standard with new
accounting standard for lease due to an old accounting standard for lease, there are
some major limitations or it can say drawbacks that restricted the company (lessee) to
record its leased assets as an operating or financing. To overcome this situation or
trouble, AASB has seen that there is much more necessary to introduce new accounting
standard that provides clear guidelines or norms to the lessee company in order to its
leased assets as operating assets or financing assets. The IASB has owned a right to
publish accounting standard and the new accounting standard i.e. published by AASB
16 (Australian Accounting Standard Board) incorporated with IRFS 16 (International
Financing Reporting Standard) for lease that was issued by the IASB (International
Accounting Standards Board). AASB from into existence with the date January 1, 2019,
for the purpose of lease accounting in the company. The company uses the rental or
leasing as a means to acquire assets for their use. The new accounting standard aid the
company and its user as the lease for assets are shown in the balance by both lessor
and lessee as an assets and liabilities respectively that help investors to make their
decision (Giner, and Pardo, 2017). By showing this in the balance sheet it not only helps
investors it also provide true and fair information to the company management.
According to the new accounting standard for lease AASB 16, it aid to the lessee and
lessor both to provide a better understanding regarding leased assets. Following are the
purpose that creates a requirement of changing the accounting standard for lease:
 For the lessee, it aids in helping or introduce a single accounting treatment that
recognizes as a right to use the assets and company for the lease liability.
 By using the new accounting standard, it assists the lessee to accelerate its potential
power r strength viz. EBITDAS.
 Provide clear and true information about the lessee company balance sheet.
 New accounting help in removing the classification of a lease for lessee as an operating
or finance lease.
 Almost all leases are to be considered or recognized as capitalized for liability and also
right of use assets.
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As the IASB introduced the new accounting standard for lease, this will lead to increase
transparency in the balance sheet of the lessee side and it provides a framework to
write the company assets as a liability or assets as the case may be for the period of
time. As the new accounting standard AASB 16 used by the company in their balance
sheet, it has a significant effect on the either on asserts or liability of balance side. The
new accounting standard provides that it is proactive and to be prepared. By the use of
the new accounting standard, it provides and reflects accurate and correct information
regarding the balance sheet of the lessee company. The new AASB 16 (accounting
standard for lease) having so many positive impacts which is a good sign from the
investor's point of view due to it helps in providing a clear understanding regarding the
company balance sheet. The will help the company to conclude the cost of owned
property and also permit or give permission to the lessee company to use leased
property which is in the hand of the lessee or possess by the lessee company (Brumm,
and Liu, 2019).
There are some changes had been made and incorporated in company new accounting
standard for lease AASB 16. Such changes are seen below which help in understanding
what changes are incorporated in the lease in reference to the new accounting
standard. The new accounting standard is AASB 16 that makes impacts the system of
how operating leases are to be recognized (Camfferman, and Zeff, 2015).
In new accounting standard for lease, the following are incorporated in new accounting
for lease.
 Treatment reading the operating lease has been incorporated for AASB 16.
 Displayed complete information on the balance sheet in terms of lease assets.
 New thing incorporated is that clarify the operating and finance lease.
 Provide a difference between each of them.
 Uses of risk and reward model for the right of use of assets.
 Provide a difference between lease liability and other company liability.
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It is necessary for all the company whether it is publicly registered or privately registered
to show its all assets and liabilities in the balance sheet of the company for the year
ended. In the earlier time companies used or treated lease assets as a finance lease
and it will create a liability towards the company that it should disclose all the facts and
key elements reading the lease. As this is clearly written in the balance sheet, it will
enable the user or investors to make decisions. Company taking assets on lease it
means it has good income sources and enough cash that’s why company prefer to own
assets on lease rather than purchasing of new assets, but always doing this process
again and again it will show to the investors that the company is not making profit or
want to not to distribute dividend to the shareholders. The reserve amounts us always
used of the company promotion that will lead to a decrease in its share value and also
investors. So it important for the company that it should always maintain a proper
balance between finance leased and owned assets. It has also another negative point is
that if company used fiancé lease then it will lead to increase its liability towards lessor
for the purpose of settlement its dues on regular basis, it company fail to pay its
liabilities then the other company may start to charges interest thereon or it may go to
the court after giving a proper notice in order to provide or remember to the lessee
company (Wong, and Joshi, 2015).
In an earlier time when new accounting standard for leas had not been applied in the
Australian company, there was no effect on the company financial lease because of it
does not specify the lease for what i.e. operating or finance. In that time all lease shall
be regarded or considered as a finance lease. But as far as new accounting standard
comes into existence then all these problems are sorted out and it provides a framework
to the company in order to write such asses on lease operating instead of finance.
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As an operating lease, all the risk and reward by the lessor company are not given or
transfer to the lessee company while in finance risk is just opposite, it means all risk and
rewards towards the lease property or assets are transferred by the lessor company to
the lessee company. companies got to the option of choosing operating lease instead of
finance lease due to as the operating lease provide a benefit to itself for the lessee
company because it does not include or not grant any permission regarding risk and
rewards related with assets or property which are taken on based lease assets. The
basic reason for considering lease property as an operating lease because it only gives
the right to use leased asset but it doesn't transfer the right of own lease property. It is
calculated as of financing balance sheet which means that an asset that was leased
and related future payments of rents liabilities are not recorded in the balance sheet of
the company, for the purpose of keeping the debt to equity ratio low. The Internal
Revenue Service, IRS, may consider the operating lease and a financing or
capital ;lease for the purpose of rejecting the company pays for lease as a deduction,
therefore it creates an extra burden over the company as it increases taxable income
and liability thereon for organization (Wong, and Joshi, 2015). As per follow positive
accounting theory, proper analyzing of the market and effective execution of accounting
theory in the business helps the company to make a good prediction on the real
situation that has a possibility of occurring. After that management of the company
change or transferred such events into the transaction for the purpose of recording in
the books of accounts. On the other hand, normative theory only suggests or advises
what could be done. Following points are regarded from the positive theory point of
view.
 The ways in which a company react to a new accounting standard that is introduced by
the issuing board (IASB).
 Actions of the company regarding which policy of the accounting standard is to be
selected in the interest of the company.
 The objective of this is to make a forecast and able to make a clear and good
understanding of reading the accounting policy and standards.
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As far as the AASB 16 introduced in an Australian company, it increases the
comparability between the two things which always create a troublesome situation for
the company. such two things are to make a clear comparison between the company
leased assets or property and those assets which are to be brought by the company in
the view of IASB. A lease can be capitalized only after known the present value of
payment then afterward lease cab is considered. If the company fail to make payment
for the assets or make payment after the stipulated time then the company knows
liability based financial which shows the duty and responsibility for making payments for
lease occur in future time (Tran, and Zhu, 2017). IFRS 16 come into existence on or
after January 1, 2019. The International Financial Reporting Standards (IFRS) 16 laid
down how the lease for accounting as operating will be recognized; provide a method of
capacity and display and disclose the financial report or statement of the company. By
using IFRS 16, the company enables to use and improve its financial and overall
performance in reference with a lease because of it provides a method and tool that
ultimately help in the comparison between a lease and owned property that was
company bought from the income of its business activities.
AASB 16 was issued by Australian accounting standard board for the purpose of
making accounting transaction into the company accounts for lease. The board said that
after the introduced new accounting standard for lease i.e. AASB 16 is necessary for
the company to sue in its business transaction or activity for those which is based on
the lease. This was is because of as the new accounting standard for lease is used
within an organization it helps in producing the company information through balance
sheet because of while using in the balance sheet it is specified lease assets by the
nature that can be easily traced and identify by investors and other people.
Taking an example in order to satisfy the above statement true, before 219, the
company used an old accounting standard for lease this will not clear the type of lease
assets (operating or financing). And the board said that to use AASB 117 was prohibited
after as far as new accounting standard for lease introduced (Christensen, et. al., 2015).
The IFRS is the new version of AASB 16, because of IFRS and AASB both board to
issue such accounting standard for lease with their mutual consent.
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When the company decided to purchase assets from their own reserve instead of taking
a loan or taking as on lease contract, it will lead a company towards profitability
condition because of the company hold sufficient cash or equivalent cash in order to
purchases assets or property rather than taking assets on lease contract. Assets can be
defined in such a way by which those properties which are owned by the company and
having possession of using it in their own or as per the suitability of the company.
assets can be purchased by the company keep in mind that assets are to be purchased
used in long terms or short term then according to this company invest its capital in the
purchasing decision. In the old accounting standard for lease, the risk and reward are
transferred and it only provides a benefit to the lessee company but as new accounting
standard are came into existence it will focus on purchasing assets instead of taking
assets on lease. If a company prefers to buy assets instead of lease, it will show a good
reputation in the market by showing its goodwill and also shows its condition or
performance is will in the market. For the purpose of taking on assets on lease, every
industry or company uses this method for taking assets because it helps in saving cash
in present and this capital can be used in any other activity that the industry leased and
the structures and the positions of the agreements of lease somehow very expressively
(Svoboda, and Bohušová, 2017).
For example, companies whose works or engaged in providing services prefer to take
assets on the lease like providing can service. It will create a situation of different with
others as accepting lease (new accounting standard). As lease assets on the lease
contract, it leads to creating liability and mental pressure because it should be returned
and make regular installment of payment if fails penalty charges apply on lessee
Company. Therefore it is best for the company too but assets instead of taking on lease.
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Here for this part of the report, Amcor limited company is chosen for the purpose of
disclosing the key elements of the company that was based on lease accounting. This
company made various disclosures regarding its leased assets which create an
advantage to the users. Following are the three risk that the company discloses in its
stamen or report.
 Market risk,
 Credit risk and
 Liquidity risk
The all below is the disclosed that present by the company statement regarding lease
purpose.
Under operating lease, payment made by the Amcor company is tale into its balance
sheet by the way of using SLM method which means straight-line method, and if the
company received any type of bonus or any incentive is treated as an expense for the
whole period under the term of the lease. While under finance lease of Amcor
Company, the overall payment made by the company is up to the minimum amount for
lease and this will used in allocation between the finance expenditure of the company,
and also this is used to minimize its liability under lease contract made by Amcor limited
company. Any part of the interest from the finance is taken into consideration in
company balance sheet due to the reason of being showing equal rate for interest over
the lease period on the unused balance. Amcor uses transitional provision regarding its
business affairs, any assets concede by the company want to remove or when after
partially been food was made in further process. It also eliminates semi-finished
products from its business activities for the aims of making its business continue. Effect
from old to new accounting standard (AASB 117 to AASB 16) respectively, is that in
past time all leased are treated or considered as a finance lease by the company but as
new AASB 16 came, it eliminates and enforce to treated all lease as an operating lease
and also put a liability to show this lease in the balance sheet in the interests of an
investors (Christensen, et. al., 2015).
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