Impact of AASB 16 Leases on Financial Statements: A Report

This report examines the new lease standard AASB 16, which addresses criticisms of the previous IAS 17 standard. It details the reasons behind AASB 16's introduction, including providing relevant financial information and a suitable basis for assessing financial performance. The report evaluates the implications of AASB 16, such as the increase in assets and liabilities, and the elimination of the distinction between operating and financial leases. It analyzes the advantages and disadvantages of the standard, including improved performance measures and increased administrative burdens. The report assesses the impact of AASB 16 on the financial statements of Boral Limited and BlueScope Limited, specifically focusing on changes in EBITDA, debt-to-equity ratios, and gearing levels. Additionally, it evaluates the social, environmental aspects, and regulatory requirements of these organizations, including carbon emission reporting and compliance with environmental laws. The report concludes by highlighting the usefulness of AASB 16 to financial statement users, emphasizing enhanced disclosures and access to relevant information for decision-making.

ACCOUNTING
STANDARDS AND
GOVERNANCE

INTRODUCTION
 Identifying the reason behind the introduction of new
lease standard AASB 16.
 Evaluating the implications of the introduction of AASB
16
 Identifying the advantages and disadvantages of AASB
16
 Evaluating the impact of AASB on the financial
statements of Bluescope limited and Boral limited.
 Evaluating the regulatory requirement of Bluescope
limited and Boral limited concerning social and
environmental information.

REASON OF INTRODUCTION
OF AASB 16
 To address the criticism of previous lease standard that is
IAS 17.
 Assisting the users in making financial decision by
providing them relevant financial information about the
leasing activities (Aasb.gov.au 2019).
 Providing a suitable basis to investors in assessing the
financial performance.
 Providing incentives to entities to opt for short term lease.

IMPLICATIONS OF AASB 16
 Increasing the liabilities and assets on the balance sheet.
 Elimination of distinction of separately reporting the
financial and operating lease.
 Accurate and faithful representations of all the financial
statements.
 Impact on the earning profiles of entities in the absence
of straight line method under the new standard (Ey.com
2019).
 Conducting comprehensive evaluation of the leased
liabilities and assets.

ADVANTAGES AND
DISADVANTAGES OF AASB 16
Advantages:-
 Provides useful basis for comparing the information
between reporting entities.
 Enabling companies to qualify as large proprietary
companies
 Improvement in performance measures such as EBIT,
operating profit and EBITDA (Ey.com 2019.
 Enhanced disclosure of financial information in the
reports published by entities.

Disadvantage:-
 Increased administrative burden and elimination of off
balance sheet accounting.
 Increased financial reporting and commercial risk due to
complexities of new standard.
 Increased expenses and cost inefficiency
 Breaching of the contracts and financial agreements both
externally and internally (Ey.com 2019).

EVALUATING THE EFFECT OF AASB 16 ON
FINANCIAL STATEMENTS OF BORAL LIMITED AND
BLUESCOPE LIMITED
 Increase in the value of EBITDA which would create an impact
on net profit before tax (Boral.com 2019).
 Decrease in current ratio and increase in debt to equity ratios
 Greater amount of interest expenses
 Change in the value of liabilities sand assets reported in the
balance sheet expenses
 Increase in gearing levels.
 Change in timing of recognizing of lease expenses
(Bluescope.com 2019)

EVALUATING THE SOCIAL ,
ENVIRONMENTAL ASPECTS AND
REGULATORY REQUIREMENTS
 Both the organizations that is Boral limited and
BlueScope limited report the total amount of carbon
emission due to the activities.
 Organizations complies with the governmental rules
and regulations concerning environmental
environmental performance.
 Activities of Boral are subjected to broad range of
safety, health and environmental laws.
 Supporting the sustainable social and economic
development in the communities.

USEFULNESS OF AASB 16 TO THE
FINANCIAL STATEMENTS USERS
 Providing the users with enhanced disclosures that result
in more faithful representation of assets and liabilities of
lessees.
 Fulfilling their information needs of users when making
any financial decision.
 Users are able to access relevant information with the help
of assessment of lease term.
 The timing, amount and any uncertainty associated with
lease can be accessed easily by the users.

FINDINGS:
 Issuing of new lease standard to address the previous
lease standard criticism.
 Considerable influence of several financial metrics due
to adoption of AASB 16.
 Compliance of organization with the environmental rules
and regulation.
 Disclosure about carbon emission and efficiency
measures for measuring energy.
 Users of financial statements are positively impacted by
AASB 16.

REFERENCE LIST:
 Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-
16.pdf [Accessed 19 Apr. 2019].
o Bluescope.com. (2019). FY 2018 - BlueScope Corporate. [online]
Available at: https://www.bluescope.com/investors/financial-
information/2018/02/fy-2018/ [Accessed 19 Apr. 2019].
 Boral.com. (2019). [online] Available at:
https://www.boral.com/sites/corporate/files/media/field_document/B
oral-Annual-Report-2018.pdf [Accessed 19 Apr. 2019].
 Ey.com. (2019). [online] Available at:
https://www.ey.com/Publication/vwLUAssets/ey-apply-leases-
update-december_2018/$File/ey-apply-leases-update-december
%202018.pdf [Accessed 19 Apr. 2019].