Accounting Standards and Regulations: Impact of AASB 16 on MYR Ltd

This report provides an in-depth analysis of the Australian Accounting Standards Board (AASB) standards AASB 117 and AASB 16, focusing on accounting for leases. It begins with an executive summary outlining the objectives of AASB 117, which concerns the accounting procedures for lessors and lessees, and introduces AASB 16, the new lease standard. The report summarizes the current accounting policies under AASB 117 and the proposed policies under AASB 16, highlighting their differences. It then examines the potential impacts of these changes on financial reports, specifically the balance sheet and income statement, for Myer Ltd. The report also evaluates the potential economic consequences of these changes for Myer Ltd. within the context of accounting theory. The analysis covers the capitalization of leases, its impact on financial ratios, and the application of the accrual concept. The report concludes by emphasizing the increased transparency in lease commitments brought about by the adoption of AASB 16, which requires the recognition of right-of-use assets and lease liabilities. References to relevant accounting standards and literature are included to support the analysis.

Running head Accounting Standards and Regulations:
Accounting Standards and Regulations

Accounting Standards and Regulations 1
Executive Summary
The objective of AASB 117 pertains to the lessors and lessees and the appropriate accounting
procedures and disclosures regarding the same. This standard applies to the accounting for all the
leases expect the lease to explore regarding the utilization of resources such as natural gas,
mineral oil and other non-regenerative resources.Furthermore, it does not apply to license
agreements like plays, motion picture films, video recordings, patents ,copyrights and
manuscripts. The proposed AASB 16 pertaining to the new lease standards would be introduced
in 2019. It would require the companies to include most of the operating leases on the financial
statements of the company. So, in this report, the current policies of AASB 117 and proposed
procedures of AASB 16 shall be summarized with the proposed impacts of transitions in the
accounting standards on the financial reports along with the economic consequences borne by
Myer Ltd, an ASX listed company. It would be explained in the context of appropriate accounting
theory related to the use of financial reports.

Accounting Standards and Regulations 2
Contents
ntroductionI ....................................................................................................................................................3
a ith reference to M R identify and summarise the current accounting policies AAS relating to( )W Y ( B117)
leases of premises........................................................................................................................................3
b ith reference to M R identify and summarise the proposed accounting policies AAS relating to( )W Y ( B 16)
leases of premises........................................................................................................................................4
c ith reference to M R e plain the potential impacts of the changes in the accounting standard on the( )W Y x
fi
nancial reports balance sheet and income statement impacts( )..................................................................4
d valuate the potential economic consequences for M R of the changes the accounting standard in the( )E Y
conte t of accounting theory related to the use of fi nancial reportsx ...............................................................5
References....................................................................................................................................................6

Accounting Standards and Regulations 3
Introduction
Australian Accounting Standards Board has formulated the Accounting Standard AASB 117
Leases as per section 334 of the Corporations Act 2001 on 15th July 2004. The main object of this
standard is to prescribe appropriate accounting standards and the disclosures for lessees and
lessors. It is applicable to every company which is required to prepare the financial statements
according to Part 2M.3 as per the Corporations Act. It is applicable to all the annual reporting
periods beginning on or after 1st January 2005 (AASB Standard 2015).
AASB 16 would be introduced for the application of a single lease application model requiring a
lessee to evaluate all its liabilities and assets for a period of not less than 12 months until the
value of the core asset is of lower value. AASB 16 carries forward the accounting requirements of
the lessor as per AASB 117 Leases. It would be effective on or after 1st January 2019(AASB
Standard 2016).
This report illustrates the differences between the proposed policies of AASB 16 and the current
policies of AASB 117 and the impact on the financial statements of Myer Ltd, a company listed
on ASX. It would also reflect the economic cost borne by the company due to this transition
which would be explained in the context of appropriate accounting theory related to the use of
financial reports.
(a)With reference to MYR identify and summarise the current accounting policies
(AASB117) relating to leases of premises
AASB 117 incorporates the principles of IAS 17 Leases as altered by the International
Accounting Standards Board. It suggests the accounting procedures for lessees and lessors and
the disclosure be applied in relation to the leases. It applies to companies which prepare their
financial reports as per Part 2M.3 under the Corporations Act along with the general purpose
financial reports of each of the reporting entity.
It is necessary for the financial statements to be general purpose financial reports. It applies to the
annual reporting periods starting on or after 1st January 2005. It applies to the accounting for all
the lease arrangements except the leases to explore for the use of mineral, natural gasses and such

Accounting Standards and Regulations 4
other nonrenewable resources and the licensing agreements for video recordings, manuscripts,
motion picture films, copyrights and patents (KPMG 2018).
It shall not be implemented as the basis of measurement for investment property as provided by
the lessors as per operating leases and property which is held by lessees as an investment property
as per AASB 140. It is not applicable to the biological assets to be held by lessees and lessors as
per finance leases as per AASB 141. It is only applicable to those agreements which allocate the
rights to utilize the assets though substantial services for operation and maintenance may be
called in by the lessor.
(b)With reference to MYR identify and summarise the proposed accounting policies (AASB
16) relating to leases of premises.
AASB 16 is applicable for annual reporting periods which would begin on or after 1st January
2019. The purpose of issuing this accounting standard was that earlier the accounting model
required the lessors and lessees to classify their leases as operating and financing leases and to
maintain a separate account for these leases. It was criticized for its failure to meet the necessities
of the users of financial statements as it did not provide an accurate representation of the leasing
transactions.
ASSB 16 was introduced as a single lessee accounting model and it required a lessee to evaluate
the liabilities and assets for all the leases for a period of more than 12 months until the value of
the underlying asset is less. A lessee should evaluate the right -of-use the asset for representing
the authority for utilizing the underlying leased asset and liability which represents the
responsibility to make the payments of the lease. It comprises requirements of disclosure for the
lessees (Tan‐Kantor Abbott & Jubb 2017).
The lessees would need to apply the judgment for determining upon the information for
disclosing to meet the objectives for providing the base for the users of financial reports so that
they can assess the effects which the lease would have on the financial performance, cash flows
and position of the lessee. It carries the accounting requirements of the lessor reflected in AASB
117 Leases (Barone Birt & Moya 2014).

Accounting Standards and Regulations 5
(c)With reference to MYR explain the potential impacts of the changes in the accounting
standard on the financial reports (balance sheet and income statement impacts)
As per PWC (2016), the changes introduced by AASB 16 Leases will have a potential influence
on the financial statements of the company because of the volume of operating leases in the retail
industry. The new standard would require all the leases to be mentioned on the balance sheet of
the company. All the changes relating to lease expense would also be stated in the financial
statements of Myer Ltd. It would also take into account the preexisting leases so the retailers
would need to consider the impact created by it on the current long-dated leases along with the
new agreements.
Under AASB 16, only the short-term leases and those of small assets would be out of the scope of
this section. All the leases except the above mentioned two would be recognized on the balance
sheet as a liability and corresponding “right-of-use” (ROU) asset. The changes in the expense
recognition would be in two ways viz. with regards to the cost of timings per year of the lease
and the method of representation in the income statement (Deloitte 2016) .
Retailers might possess a huge portfolio of leases with varying expiry and renewal dates. An
impact on the portfolio may decrease the volatility of the income statement due to the newly
adopted accounting standard but the timings of substantial renewals may instill fluctuations in the
expenses incurred in each of the years (Xu Davidson & Cheong 2017).
(d)Evaluate the potential economic consequences for MYR of the changes the accounting
standard in the context of accounting theory related to the use of financial reports
As per Wong & Joshi 2015, due to the fluctuations in the accounting standards pertaining to lease
in Australia, the lessees would be required to amortize the cost for the liability of lease and right-
of-use asset and for other leases by applying the Single Lease Expense approach resulting in the
recognition of the straight line expenses of lease over the terms of lease. The capitalization of
the lease would have an impact on the financial ratios and statements of Myer Ltd. which would
result in the decline of its key financial ratios and retained earnings. Through the reporting of
operating leases as capital leases under the new AASB 16, there would be a decline in the ratios
relating to return on assets, interest coverage and debt to equity.

Accounting Standards and Regulations 6
The accounting theory of accrual concept would be applied in the capitalization of the lease as the
expense would be recorded as and when they occur not when they are paid. Application of
accrual concept would lead inappropriate reporting of the lease on the financial statements. The
accounting of lease using the accrual concept would be that the lessee would capitalize the
financed leased asset and set up the liability of the lease for the worth of the recognized asset.
This would lead to debiting the non-current assets and crediting the finance lease liability (Wolk
Dodd & Rozycki 2017).
Hence to conclude it can be said that the leases of property and equipment were previously
recognized as off-balance sheet and now with the adoption of AASB 16, they would be
accumulated as an authority of use liability and asset of the lease which would bring transparency
in the commitments of the lease of the company.

Accounting Standards and Regulations 7
References
AASB Standard 2015, AASB 117: Leases, viewed 20th September, 2018,
<https://www.aasb.gov.au/admin/file/content105/c9/AASB117_08-15.pdf>
AASB Standard 2016, AASB 16: Leases, viewed 20th September, 2018,
<https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf >
Barone, E., Birt, J. & Moya, S. 2014, ‘Lease accounting: A review of recent literature’,
Accounting in Europe, vol. 11, no 1, pp.35-54.
Deloitte 2016, Leases: A guide to AASB 16, Deloitte Touche Tohmatsu Limited.
KPMG 2018, AASB 16: Leases, viewed 20th September, 2018,
<https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-leases-standard.html >
PWC 2016, How will the new leases standard affect retailers? viewed 20th September, 2018,
<https://www.pwc.com.au/assurance/ifrs/assets/new-leasing-standard-and-retailers.pdf >
Tan‐Kantor, A., Abbott, M. & Jubb, C. 2017,’ Accounting Choice and Theory in Crisis: The
Case of the Victorian Desalination Plant’, Australian Accounting Review, vol. 27, no 3, pp.273-
284.
Wolk, H.I., Dodd, J.L. & Rozycki, J.J. 2017, Accounting Theory : Conceptual Issues in a
Political and Economic Environment, Sage Publications Inc.
Wong, K. & Joshi, M. 2015 ,’The Impact of Lease Capitalization on Financial Statements and
Key Ratios: Evidence from Australia’ Australian Accounting, Business and Finance Journal, vol.
9,no.3, pp. 27-44.
Xu, W., Davidson, R.A& Cheong, C.S. 2017,’ Converting financial statements: operating to
capitalized leases’ Pacific Accounting Review, vol.29 , no. 1, pp.34-54.