Advance Accounting: AASB 16 Report on Lease Accounting Standards

This report analyzes the AASB 16, the new lease accounting standard in Australia, which mirrors IFRS 16. It examines the shortcomings of the previous standards (IAS 17/FAS 13) and the benefits of the new standard, which mandates the recognition of all leases as either assets or liabilities, except for low-value assets or short-term leases. The report explains the roles of lessors and lessees under AASB 16, including the recognition of right-of-use assets and lease liabilities. It discusses the impact of the standard on financial statements, the need for disclosure, and the economic reality it portrays. The report also highlights the prevalence of leasing in various industries, the previous practice of off-balance sheet operating leases, and the financial implications of these practices. It further explores the changes required in accounting procedures and the benefits of the new standard for stakeholders, including improved comparability and a more accurate representation of financial positions. The report concludes that while the implementation of AASB 16 may present challenges, the benefits outweigh the costs.

Running head: ADVANCE ACCOUNTING
ADVANCE ACCOUNTING
Name of the Student
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Author Note

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Executive Summary
AASB or Australian Accounting Standards Board have issued AASB 16 for leases effective
from 1st January 2019 incorporating all provisions from the IFRS 16 for leases. This new
standard will implement an equal or uniform standard for accounting of leases within
Australia. This will benefit will benefit both the organizations as well as the users of their
financial statement. The aim of this report is to elucidate the meaning and working of the
AASB (IFRS) 16 for leases and for accomplishing the aim of the study, the previous lease
reporting standard and its shortcomings as well as the new lease reporting standard and its
benefits have been critically analyzed.

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Table of Contents
Introduction................................................................................................................................3
Solution to answer no (a)...........................................................................................................4
Solution to answer no (b)...........................................................................................................4
Solution to answer no (c)...........................................................................................................5
Solution to answer no (d)...........................................................................................................6
Conclusion..................................................................................................................................6
References and bibliography......................................................................................................8

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Introduction
AASB 16 was enforced by the government of Australia, more specifically by the
Australian Accounting Standards Board on 1st January 2019. Before the application of this
standard, all companies operating within the territory of Australia used to follow AASB 15
“Revenue from Contracts with Customers.” With the implementation of this new standard on
leases within Australia, the government aims to introduce a fresh and new single or uniform
accounting model on leases (Brumm & Liu, 2019). Under this new accounting model on
leases all lessee will have to register all leases as either assets or liabilities according to their
nature which comes under the term of 12 months or more. However, there may be an
exemption to such recognition if the asset is of a lower value or denomination. Here,
according to AASB 16, a lessor is the owner of the asset and leases such asset to another
person or firm on account of a lease agreement between the two. On the other hand, a lessee
is an entity or the firm that takes the asset under control from the lessor on account of the
lease agreement between the two (Ifrs.org, 2020). Here, according to the new standard
effective as on 1st January 2019, the lessee must record such leased property either as an asset
or liability according to the nature of such property except such property are of lower
denomination or value. The lessee have to register a “right-of-use” asset signifying the right
to use such underlying asset and also have to register a “lease liability” demonstrating its
obligations to pay for such underlying lease.
The new accounting standard, AASB 16 on leases, effective from 1st January 2019,
incorporates all the provisions as stated in the IFRS 16 on leases developed by the
“International Accounting Standards Board.” All profit making entities operating within the
territory of Australia will have to prepare their financial statements relating to leased assets
and liabilities as per AASB 16 (Aasb.gov.au, 2016). However, all not for profit entities are
entitled to prepare financial statement relating to leases as per AASB 16. There are some
fixed requirements regarding disclosure of lease transaction in the financial statements.
Lessees are required to apply their own judgment in disclosing the legitimate lease related
information on their financial statements so that the financial information users are not
devoid of the clear picture of the organization and they could easily assess the effects of such
lease contracts on the cash flow and organization’s financial position (Aasb.gov.au, 2016).
Such disclosures are made a mandate by the AASB to all the companies providing assets or
properties on lease so that the lessor’s exposure to risk especially residual value risk are

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disclosed in a proper manner and especially to serve the financial information users of such
lessor like its shareholder and other stakeholders.
Solution to answer no (a)
The former accounting standards like the IAS 17 or FAS 13 did not truly portray the
economic reality in most cases. This is even evident on the statement made by the IASB
Chairman Mr. Hans Hoogervorst. The existing standards did not made it mandatory to
register and recognize operating leases on to the financial statements specifically on the
organization’s balance sheet (Ifrs.org, 2020). This caused omission of many assets and
liabilities in the balance sheet of the organization. According to the IASB, there are
approximately USD 3.3 trillion of lease commitments operational around the world.
However, only on an average 15% find its spot on the organization’s balance sheet while the
massive share of 85% are not recorded and simply omitted from the organization’s balance
sheet. This practice of not recording the underlying lease agreements in the financial
statements in terms of assets and liabilities is causing massive problems for the financial
analysts as well as for the present and potential investors. This non recording of financial
liabilities is depicting an understatement of liabilities in the balance sheet of the companies.
This why the Chairman of the IASB claimed that the former lease standards did not reflected
the economic realty. This is where the new AASB 16 comes to the rescue. It mandates all
lessee to recognize their lease liabilities as well record such leased asset as “right-of-use” in
their balance sheet. A lessee has to treat all leased assets or “right-of-use” asset like all other
tangible assets like the land, machinery and others and all lease liabilities similar to all other
financial liabilities (Aasb.gov.au, 2016). Therefore, the lease recognizes and registers
depreciation of such underlying used assets as well as interest on such lease liability. It also
recognizes the repayment in terms cash on such lased assets as two different sections of
interest and principal. Such transactions are presented in the cash flow statement of the
financial statements following the AASB 107 provisions. The liabilities and the assets that
forms the part of the lease are measured and recorded on the basis of their present values.
Such measures consists of payments that needs to be paid that is, lease payments of non-
cancellable type that includes transactions like inflation-linked payments and optional period
payments on account of option put in front for extension or non-extension of such underlying
lease.

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Solution to answer no (b)
Leasing is considered as the most common a widely used form of finance in the
market. It is widely used in sectors retail industry, airline industry, shipping industry, mining
industry and many more. In today’s time there are more than USD 3.3 trillion of lease
arrangements existent around the world and out of which around 85% of the lease
arrangements are not recorded in the balance sheet of the respective companies owing to be
labelled as “operating leases.” This created a situation of crisis (Ifrs.org, 2020). Operating
leases does not find a place in the balance sheet and hence the general public cannot see the
real picture of the financial position of the firm. Operating leases are kept off-balance sheet;
however, there is no doubt that such operating leases creates a real liability on the business
entity. This cosmetic dressing of the balance sheet lead into the financial crisis. Amidst this
financial crisis major companies around the world especially the retail chains filed for
bankruptcy owing to non-adjustment with the sudden and new economic reality. These
companies had considerable operating lease arrangements of long-term nature which they
carefully and in a crafted manner kept such lease arrangements aloof from the balance sheets
of the firm. This is how they presented a lean balance sheet in front of the stakeholders
especially its investors. This is how the off balance sheet liabilities relating to lease
arrangements are sixty six per cent more than the reported debt on the liability side of the
balance sheet. This clearly shows the fact the financial statements especially the balance sheet
of such companies does not depict the economic reality. The Chairman of IASB too admitted
the fact that there is an adverse and urgent need to tackle such situation and the need of the
hour was adoption of a single accounting procedure for lease arrangements around the world.
This situation directed for the development of the IFRS 16 and AASB 16 adopted all the
provisions of IFRS 16 relating to establishment of a single or uniform standard for lease
accounting in whole of Australia effective from 1st January 2019.
Solution to answer no (c)
The companies not recording the operating leases in the balance sheet is creating a
misconception among the stakeholders where the company is presenting a balance sheet with
a facade where the liabilities are shown very less in amount especially debt part. This is why
majority of the renowned retail chains around the world filed for bankruptcy during the
financial crisis. The financial liabilities of these companies were more than 66% of the
reported debt on their balance sheet. This particular situation created a situation of fear

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among the common investors of these firms (Ifrs.org, 2020). Some of the investors started to
add back some of the information they had about the operating leases to arrive at an actual
liability of the firm; however, such arrived figures are just an assumption and not the reality
and may be way more or less above or below the real mark. It should also be taken into
consideration that all investors do not have such detailed information about operating leases
and some are not able to properly calculate or add back such figures and at times the
companies are well aware of this fact. There can be situations where the companies in order
to get rid of the debt disclosure requirements structure or design their lease obligations in
such a manner that they do not appear on the liability side of the balance sheet and stay as
operating leases without getting recorded in the financial statements. This allows these
companies to present a modified financial statement in front of the shareholders and other
stakeholders. So, it can be said that there is basically no difference between the companies
taking assets on lease and showing it as operating lease with the companies buying its assets
and then using it (Ifrs.org, 2020). For instance, an airline that takes most of its airline fleet on
lease may look different from an airline that buys and operates its airline fleet however the
financial statements in both cases looks alike because the airline that operates its flights taken
on lease shows such amount of lease as operating lease which are no expressed in the balance
sheet. Therefore, the old standard on leases did not have the feature of comparability of
financial statements of firms operating in a same line of business where one has uses leased
assets and do not report such lease as liabilities in the balance sheet with the one operating
with purchased assets. So, it can be said that the old standard did not offer a level playing
field for some of the companies.
Solution to answer no (d)
The newly developed accounting standard that is AASB 16 once implemented with
effect from 1st January 2019 will require substantive changes in the accounting procedure of
all the companies operating within the domestic territory of Australia especially the ones that
either gives assets on lease and the ones that takes assets on lease (Ifrs.org, 2020).
Implementation of new accounting standard 16 will make it a mandate for the companies to
make substantial changes in the balance sheet of the companies, may cause adverse economic
effects, huge system changing costs and may bring up huge default on debts. This is why
leases are “not popular with everyone.” However, according to the authorities, the
implementation of the new standard on leases will produce more benefit to the organization

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and its stakeholders than the price the organization has to bear for implementation of the
newly developed accounting standard on leases.
Conclusion
Operating leases can be best explained as the utilization of the asset by the lessee but
there is no ownership rights on such assets. Such leases do not find a place in the balance
sheet and hence it is known as off-balance sheet lease arrangement (Sacarin, 2017). On the
other hand, in finance lease the owner of the asset is set out on lease to the lessee and such
leased asset finds its spot in the balance sheet. The finance lease can be best explained with
the help of the following two examples of retail companies from Australia who records the
lease in their respective balance sheets and on statement of cash flows as per AASB 107,
namely- “Harvey Norman Holdings Ltd” and “ Myer Holdings Ltd.” For Harvey, the total
amount of lease properties depicted from Ruzden Pty Ltd as on June 2019 was $5,134,607
million and amounts on finance leases to be received from lessees are recorded as receivables
(Static1.squarespace.com, 2018). While Myer recorded a lease of $25,786 million as on 2018
(Investor.myer.com.au, 2020). Therefore, it can be said that with the implementation of
AASB 16, the accounting for leases in Australia would be uniform which will benefit both
the organizations as well as the users of their financial information.

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References and bibliography
Aasb.gov.au, 2016. AASB 16. [ebook] Australian Accounting Standards Board. Available at:
<https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf> [Accessed
14 April 2020].
Brumm, L., & Liu, J. (2019). New leasing accounting standard. Taxation in Australia, 53(8),
449.
Ifrs.org, 2020. IFRS. [online] Ifrs.org. Available at:
<https://www.ifrs.org/news-and-events/2016/03/hans-hoogervorst-article-shining-the-
light-on-leases/> [Accessed 14 April 2020].
Ifrs.org, 2020. IFRS. [online] Ifrs.org. Available at:
<https://www.ifrs.org/issued-standards/list-of-standards/ifrs-16-leases/> [Accessed 14
April 2020].
Investor.myer.com.au, 2020. Myer Investor And Media Centre. [online]
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page=Annual-Reports> [Accessed 14 April 2020].
Joubert, M., Garvie, L., & Parle, G. (2017). Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance
Sheet. The Journal of New Business Ideas & Trends, 15(2), 1-11.
Laing, G., & Perrin, R. W. (2014). Deconstructing an accounting paradigm shift: AASB 116
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Accounting, 6(5/6), 509-519.
Liviu-Alexandru, T. (2018). The Advantages that IFRS 16 Brings to the Economic
Environment. Ovidius University Annals, Economic Sciences Series, 18(1), 510-513.

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Morales Díaz, J., & Zamora Ramírez, C. (2018). IFRS 16 (leases) implementation: Impact of
entities’ decisions on financial statements. Aestimatio: The IEB International Journal
of Finance, 17, 60-97.
Morales-Díaz, J., & Zamora-Ramírez, C. (2018). The impact of IFRS 16 on key financial
ratios: a new methodological approach. Accounting in Europe, 15(1), 105-133.
Nasip, I., & Sudarmaji, E. (2018). Managing tax dispute due to IFRS-16 on the retrofits
implementation in Indonesia. International Journal of Engineering &
Technology, 7(3.21), 200-208.
Öztürk, M., & Serçemeli, M. (2016). Impact of New Standard" IFRS 16 Leases" on
Statement of Financial Position and Key Ratios: A Case Study on an Airline
Company in Turkey. Business and Economics Research Journal, 7(4), 143.
Sacarin, M. (2017). IFRS 16 “Leases”–consequences on the financial statements and
financial indicators. The Audit Financiar journal, 15(145), 114-114.
Sari, E. S., Altintas, T., & Tas, N. (2016). The effect of the IFRS 16: constructive
capitalization of operating leases in the Turkish retailing sector. Journal of Business
Economics and Finance, 5(1), 138-147.
Shah, F., Davern, M., Hanlon, D., & Gyles, N. (2019). Implementing AASB 16 Leases: Are
Preparers Ready?.
Static1.squarespace.com, 2018. 2019 ANNUAL REPORT. [ebook] Harvey Norman Holdings
Limited. Available at:
<https://static1.squarespace.com/static/54803162e4b08e1b8a472201/t/
5dac405a64fbcd1ae7b3bd58/1571569849947/HVN+2019+Annual+Report.pdf>
[Accessed 14 April 2020].