Financial Reporting and Analysis: Impact of AASB 16 on CSL Limited

This report provides a comprehensive analysis of financial reporting and the impact of the new AASB 16 standard on lease accounting. It begins with an executive summary highlighting the appropriate recognition criteria for financial and operating leases under AASB 16, referencing the 2017 annual report of CSL Limited to illustrate the practical application. The report then delves into the details of AASB lease recognition criteria for both financial and operating leases, followed by a discussion of the key differences between these two types of leases. The report uses the CSL Limited 2017 annual report to exemplify these concepts, showing how the company reports both financial and operating leases. Furthermore, the report examines the implications of AASB 16, highlighting its positive impact on the proper reporting of various financial aspects like assets, liabilities, and debts. It concludes that the new standard has an overall effective effect on the financial reports of companies like CSL Limited, providing clarity and consistency in financial statements. References to relevant accounting standards and reports are also included.

Running head: FINANCIAL REPORTING AND ANALYSIS
Financial Reporting and Analysis
Name of the Student
Name of the University
Author’s Note

1FINANCIAL REPORTING AND ANALYSIS
Executive Summary
This report shows that the new AASB 16 standard has more appropriate recognition criteria for
both Financial and Operating leases. In addition, there are some major fundamental differences
between Operating and Financial leases. From the 2017 annual report of CSL Limited, it can be
seen that the amount of Financial lease and Operating leases of are $22.3 million and $3.1
million. Most importantly, it can be seen that the new AASB 16 standard has effective impact on
the financial reports of the companies.

2FINANCIAL REPORTING AND ANALYSIS
Table of Contents
Introduction......................................................................................................................................3
Part A...............................................................................................................................................3
AASB Lease Recognition Criteria...............................................................................................3
Difference between Operating and Financial Leases..................................................................4
Example.......................................................................................................................................5
Part B...............................................................................................................................................5
Implications.................................................................................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7
Appendix..........................................................................................................................................8

3FINANCIAL REPORTING AND ANALYSIS
Introduction
Lease is a special contract or agreement in which the lessees has to pay the lessor for the
use of his/her assets for a specific period of time. Thus, it can be seen that leases are an important
aspect in accounting. In lease agreements, the assets have to be tangible in nature. The Australian
Accounting Standard Board (AASB) provides some specific guidelines regarding the recognition
and measurement of leases in the business organizations and the companies need to comply with
these regulations. The main aim of this report is to analyse and evaluate the various aspects
regarding lease agreements in the companies.
Part A
AASB Lease Recognition Criteria
There are two types of leases; they are Financial Lease and Operating Lease. AASB has
different recognition criteria for both the leases. They are discussed in the following section:
Financial Leases:
 At the date of the commencement of the financial year, the lessor needs to use the
implicit rate of interest in the leases for the measurement of net investments. In case, it is
not possible for the lessor to determine the implicit rate of interest, it is required for the
lessor to use discounted rate for the heading of sublease (aasb.gov.au 2017).
 At the time of measuring the total amount invested in the financial leases of the company,
the lessor needs to include initial direct costs other than the manufacturing costs. In
addition, the lessor needs to reduce the recognition of the amount of income. The implicit
rate of interest in financial leases includes the initial costs of the new lease investments.

4FINANCIAL REPORTING AND ANALYSIS
 The lessor needs to recognise the total amount of investments in financial leases based on
the pattern reflecting a constant periodical rate of return of the net investments of the
lessor (aasb.gov.au 2017).
Operating leases
 The lessor needs to recognize the payments from operating leases, as income and it needs
to be done based on either straight line or another systematic basis (aasb.gov.au 2017).
 At the time of the recognition of operating leases, the lessor needs to recognize various
costs that include depreciation at the time of earning from leases.
 The lessor needs to add the initial direct costs of the leases at the time of leases
recognition (aasb.gov.au 2017).
 The lessor needs to present the details about all the operating leases in the financial
statements at the end of the financial years.
Difference between Operating and Financial Leases
Operating Lease Financial Lease
 The risks ands and rewards of asset
ownership remain with the lessor
(Brealey et al. 2012).
 The risk and rewards related to the
ownership transfer to the lessee.
 Operating lease needs to be treated as
rents and there is no need to show it in
the balance sheet.
 Financial leases need to be treated like
loans and thus, it appears in the balance
sheet.
 There is not any purchase option of the
asset in the lease period.
 Financial leases have the purchase
option in the lease period.
 No running costs of the assets need to
be borne(Grinblatt and Titman 2016).
 Running costs need to be borne and it is
higher.
 The lessor cannot claim any amount for  The lessor can claim the amount

5FINANCIAL REPORTING AND ANALYSIS
depreciation. interests as well as depreciation.
 The lessee has to pay only the monthly
lease payments.
 The lessee has to pay tax, maintained
and insurance expenses (Vernimmen et
al. 2014).
Example
As per the 2017 annual report of CSL Limited, on 30 June 2017, it can be seen that the
company has reported $3.1 million and $2.5 million in 2017 and 2016 respectively as current
lease liabilities; and $22.3 million each for 2016 and 2017 as non-current liabilities. As per the
earlier discussion, leases under current liabilities are operating leases; and leased under non-
current liabilities are considered as financial leases. Thus, from the above discussion, it can be
seen that CSL Limited reported both financial as well as operating leases in 2017 (csl.com.au
2017).
Part B
Implications
The new AASB 16 standards help the business organizations in the proper reporting of
various financial aspects like leases of assets, liabilities, debts, assets, debt agreements, profits
and expenses (kpmg.com 2017). Previously, the accountants of the companies had to face many
difficulties in the recognition of leases, expenses, profits and others. However, with the help of
new AASB 16 standards, the accountants have become able to maintain proper disclosure of
financial aspects. In case of CSL Limited, it can be seen that the company has been able to
segregate the amount of operating lease and financial lease in the most appropriate manner.
Apart from the leases, in case of the recognition of expenses and debts, the company has adopted
the strategy of fair value in which the market value of the assets and loans has been taken into

6FINANCIAL REPORTING AND ANALYSIS
consideration (csl.com.au 2017). Thus, from the above discussion, it can be seen that the new
AASB 16 framework has overall effective effect on the financial reports of CSL Limited.
Conclusion
From the above discussion, it can be seen that there are two kinds of leases; they are
Financial Lease and Operating Lease. For both these two types of leases, AASB 16has different
recognition criteria. In addition, the above discussion shows that in financial lease, ownership
does not transfer. However, in operating lease, there is not any transfer of ownership. From the
financial report of CSL Limited 2017, it can be seen that the company has shown their operating
as well as financial leases on a separate basis and this new AASB 16 standard has overall good
implication on the company’s financial statements.

7FINANCIAL REPORTING AND ANALYSIS
References
Aasb.gov.au. (2017). Accounting standards. [online] Available at:
http://www.aasb.gov.au/Pronouncements/Current-standards.aspx [Accessed 22 Sep. 2017].
aasb.gov.au. (2017). Definition and Recognition of the Elements of Financial Statements.
[online] Available at: http://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf
[Accessed 22 Sep. 2017].
aasb.gov.au. (2017). Leases. [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf [Accessed 22 Sep. 2017].
Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance.
Tata McGraw-Hill Education.
csl.com.au. (2017). Annual Report 2016/2017. [online] Available at:
http://www.csl.com.au/docs/802/1/CSL_AR17%20(secured),0.pdf [Accessed 22 Sep. 2017].
Grinblatt, M. and Titman, S., 2016. Financial markets & corporate strategy.
KPMG. (2017). Impact of AASB 16: the new Leases standard. [online] Available at:
https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-leases-standard.html [Accessed 22
Sep. 2017].
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance:
theory and practice. John Wiley & Sons.
Dakis, G.S., 2016. Upcoming changes to contribution and leasing standards. Governance
Directions, 68(2), p.99.

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Appendix
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