BAO2202 Group Assignment: AASB16 Lease Accounting Standard Report

This report analyzes the shift in lease accounting standards from AASB117 to AASB16, focusing on the reasons behind the change and its implications. The primary drivers for the transition were the need for greater transparency for investors, the concerns of stakeholders regarding the accuracy of financial positions, and the lack of comparability between firms under the old standard. AASB16 addresses these issues by requiring the inclusion of both lease liabilities and right-of-use assets on the balance sheet, enhancing financial reporting quality and allowing for better comparison within the industry. The new standard also covers the significance of contracts in leasing agreements and the impact of substantive substitution rights. Overall, AASB16 aims to provide a more complete and accurate picture of a company's financial health related to lease transactions, benefiting investors and other stakeholders.

Running head: CONCLUSION
CONCLUSION
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Author Note

1CONCLUSION
Lease refers to an agreement between the owner of an asset and the user of that
particular asset; wherein the lessee or the user of the asset pays consideration to the lessor
that is, the owner of that asset for using it. So lease can be considered as a valid contract
wherein there is a legal binding on both the parties created out of such contract. The most
common types of leased assets includes land, buildings, equipment and many more (Shah et
al., 2019). Lease can be considered as a widely accepted and most popular type of finance in
business where a business need not to own the assets to use it and in this way can save
substantial amount of cost. AASB is responsible in formulation of accounting standards in
Australia and the prevalent standard on lease was AASB 117 which was replaced with AASB
16 being effected from the current financial year due to several reasons. The principal driving
force behind this shift in standards was generated by the investors in want of greater lease
transaction related information. So, the primary reason behind this change is the need of the
investors (Holland 2016). Lease accounting as per IAS 17, heavily depended upon the
segregation of leases into operating lease and finance lease which resulted in omission of
many lease transactions from the Balance sheet and those found its place in the only in the
income statements as expenses. Apart from the need of the investors, many other
stakeholders demanded for the accuracy of the financial position of the firm relating to lease
treatment. As per the AASB 117, the operating leases were not recorded in the Balance sheet
in spite of the company’s commitment on such future expenses. As a result, 85% of such
transactions being branded as operating expenses, get omitted from the Balance sheet and the
stakeholders are devoid of the real financial health of the company. The other significant
factor or reason behind the shift of the standards is the inability of comparison within the
industry (Joubert, Garvie and Parle 2017). As per the existing standard one could not
compare between firms operating in the same industry. To ensure comparison between the
firms operating in the same industry, AASB changed its existing standard on lease that is,

2CONCLUSION
from AASB 117 to AASB 16. As per the new standard, both the lease liability as well as the
right to use asset can be included in the balance sheet. So, after implementation of the new
standard, the firm will have to include both the cost of use of the asset as well as its benefits
in the balance sheet (Xu, Davidson and Cheong 2017). This will immensely benefit the
investors and other stakeholders in a way of complete disclosure of the lease transactions
thereby helping them in getting the real financial standing of the company. Another feature of
AASB 16 is allowing certain rental contracts as lease debts on the Balance sheet along with
the obligations to use such asset. To conclude, the newly adopted AASB 16 will enhance the
quality as well as allow for comparability of financial reporting relating to lease transactions.

3CONCLUSION
References
Holland, D., 2016. Simplifying income recognition for not-for-profit entities. Governance
Directions, 68(11), p.666.
Joubert, M., Garvie, L. and 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), pp.1-11.
Shah, F., Davern, M., Hanlon, D. and Gyles, N., 2019. Implementing AASB 16 Leases: Are
Preparers Ready?.
Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating
to capitalised leases. Pacific accounting review.