Detailed Report on AASB 16: Changes and Effects on Lease Accounting

This report provides a comprehensive analysis of the AASB 16 accounting standard, which replaces AASB 117, focusing on its implications for lease accounting. It begins with a critical evaluation of the drawbacks of the old AASB 117 standard, highlighting why the change to AASB 16 was necessary. The report details the changes incorporated in AASB 16 and their impact on companies, particularly those in technology, media, and telecommunications. It also discusses the effectiveness of the IASB and explores how AASB 16 may influence asset purchase or lease decisions. The report further examines Woolworths' key disclosures regarding lease accounting and their transition from AASB 117 to AASB 16. It concludes by summarizing the key findings and implications of the new standard, emphasizing the need for businesses to upgrade their processes and technologies to comply with AASB 16. Desklib provides additional resources, including past papers and solved assignments, for further study.

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Abstract
The given report talks about the implementation of the AASB which is the new standard
replacing AASB 17. It needs to be largely understood that the new approach to lease the
accounting can considerably provide the different investors as well as the other stakeholders in
order to create a rather transparent as well as complete view of a firm`s overall financial image.
This means that the overall work for the particular industry will increase considerably. The
impact on the overall operations of the firm will also be considerably high with respect to which
it can be largely understood that, the businesses would be required to upgrade their overall
business processes and supporting technologies will be required to be developed so as to comply
with the different standards as present. Hence, the report analyses the various aspects of the
same.

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Table of Contents
Introduction......................................................................................................................................3
Critical evaluation of the old accounting standard for lease (AASB 117) specifically highlighting
the drawbacks..................................................................................................................................3
Why was the change necessary?......................................................................................................4
The AASB 16- Changes incorporated and Impact on the companies.............................................5
Effectiveness of IASB and related view..........................................................................................8
Reason why the implementation of the AASB 16 may have an impact on the purchase or lease of
the assets..........................................................................................................................................9
Key disclosures made by the Woolworths with respect to the overall accounting for lease and
their transition from the AASB 16 to AASB 117..........................................................................10
Transition...................................................................................................................................11
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
Accounting forms a critical part of the organization and any firm which wants
considerable success in the long run would be required to ensure that the firm is successfully able
to abide by the different laws as well as regulations related to the field of accounting. In addition
to this, it also becomes important for the firm to keep updating itself with new principles and
standards coming into the competitive business environment regularly (AASB 2015). In line of
this, the case of the new AASB accounting standards for the leases can be largely considered
which will then go a long way in seeing to it that the firm is successfully able to engage in the
accounting for the leases in the right manner and adopt for the change in the right way from the
old standard to the new. Hence, the primary aim of the particular report can be stated to be the
analysis of the new AASB (Australian Accounting Standards Board) 16 which has come into
place by replacing the AASB 117. The report will follow a systematized format in line of which
the drawbacks of the old standard will be analysed and followed by the need and competence of
the new standard which tends to exist in the Australian workplace. The latter section of the
report will take up the example of Woolworths and understand the manner in which it has been
able to transit through the particular change.
Critical evaluation of the old accounting standard for lease (AASB 117) specifically
highlighting the drawbacks
The accounting for the lease can be considered to be largely similar to the manner in
which the finance leases are currently treated under the AASB 117. This means that when the
lease liability will be measured at the present value of the lease payments, it will be discounted at
the interest rate implicit in the lease. The different payments which have been included in the
lease can be stated to be related to the payments of fixed payments, variable lease payments

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which are largely depended on an index or a rate for example the rental payments which are
generally indexed to the consumer price index or the RBA reserve rate. It also comprises of any
amount which is largely payable upon the residual value guarantee and also the exercise price of
an option which is reasonably certain to be exercised effectively (Hall 2015). In line of this, any
lease incentives which are receivable tend to be deducted from the payments. Additionally, the
variable lease payments for example the rent for a retail store based on the percentage of
turnover are not taken to be a part of the lease liability and are generally expenses as they fall
due.
Hence, in line of this, once the liability has been determined, it is generally recognised at
the inception of the lease and together with the right of use asset it is made use of for the same
value. It can be largely understood and stated that the reason why the AASB 117 has been
largely stated to be removed and replaced by the AASB 16 is because, it can be considered to be
largely obsolete in nature and has not been fulfilling the overall requirements of the changing
business scenario. In line of this, it can also be understood that if the firm aims to ensure success
in the long run, it needs to update itself and come up with the different standards which will be
able to meet the overall needs of the business (Morales-Díaz and Zamora-Ramírez 2018). Hence,
the AASB 117 has been replaced with a better version named AASB 16.
Why was the change necessary?
The different accounting standards which are largely present in the business environment
is governed by an international board which will be required to incorporate the different local as
well as international issues in the standards as undertaken by them. It is because of this reason
that these standards need to be modified accordingly (Sari, Altintas and Taş 2016). The change
was essentially required because until the implementation of the AASB 16 only the capital or the

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finance leases were required on the different balance sheets as a liability as well as an asset. They
were treated as a means for acquiring the different assets (Joubert, Garvie and Parle 2017). This
particular aspect of the particular standard does not undergo a change but the new requirements
mean that, the different operating leases falling into the traditional rental category will have to be
reflected in the balance sheets.
The AASB 16- Changes incorporated and Impact on the companies
The revised standards which can be largely referred to as the issuance of the global lease
accounting standard, which is the AASB 16 in this case takes effect from the year 2019.Until
then, as mentioned earlier, the capital or the finance leases were required on the balance sheets as
both a liability and fixed asset which can be treated as a means for acquiring the different asset.
That particular aspect of the standards does not undergo any change but it becomes considerable
critical to ensure that the firm is being able to ensure that the impact is being reflected on the
different balance sheets of the firm. The new standards as present require that the operating
leases of the 12 months must be essential reflected on the balance sheet both as an asset as well
as a liability even under the condition that the lessee`s intent lies to return the overall assets to
the owner as well as the landlords (You 2017). The particular standard is applicable to the real
estate as well as the tangible property which tends to extend to all the properties, plants as well
as the equipment’s which are present. The intangible items tend to remain excluded in such a
case.
According to Sari, Altintas and Taş (2016), the particular set of revamped standards
represent considerable change for the companies which tend to operate in technology, media as
well as the telecommunications space and tend to significantly increase the debt amount as
present on the different balance sheets as present. For the different TMT firms as mentioned

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earlier, the expected amount of work is highly significant. The telecommunications industry will
be subject to questions on every aspect from the real estate, fibre networks, set up boxes,
hardware as well as the towers. In addition to this, the different media companies, at the same
time will be faced by similar challenges in line with specific questions arising over the overall
advertising services which are generally received and the different assets which are used in the
advertising of the media content like the billboard as well as web properties in case of an
identified asset existence. It also becomes considerably crucial to understand that the economic
benefit which a company generally receives will be scrutinised (You 2017). In line of the
technology of the firm, it is crucial to understand that there could arise large questions in the
domains of cloud computing, services, ownerships as well as the different leases as present.
Moreover, in line of this, it needs to be understood that, the change in the accounting
standard will change the manner in which the debt provisions are dealt with, thereby making it
easier for the mining companies to achieve hedge accounting. In line of this, it becomes
considerably very important for the members of the firm to introduce complex rules with respect
to when a revenue can be recognised and in a similar manner, scrapping the operating lease
transformation calculation which brings all the leases to be paid by the firm together in line with
the lease liability on the balance sheet of the firm. Additionally, it needs to be noted that the
adoption of AASB 16 will be complex for mining firms due to the asset intensive nature of the
industry and for this reason, a preliminary analysis on their financial reporting will become
increasingly crucial (AASB 2015).
Under the AASB 16 the different miners were simply applying just a single model for all
the leases as present, however, they were not provided with any options to recognise the different
short terms leases or lease of the low value assets (You 2017). However, after the particular

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standard has come to action it can be rightfully understood that, the different miners will be
successfully able to recognise a liability and make the considerable amount of lease payments
which will go a long way in assisting them to use the asset in the right period and will also go a
long way in assisting the business to see to it that, the business is able to replace the rent expense
with the interest expense and in line of this, this shall result in ensuring that the firm will be able
to depreciate the assets in a straight line basis and a front loaded expense recognition pattern
shall be identified.
In line of this, another impact of the new standard can be identified to be the separation of
lease as well as the non-lease components of the business. This means that, due to this aspect,
there shall be more depth on the balance sheet and hence, the different businesses will prefer to
separate the non-lease service elements within the particular contract and account for the
expenses separately. This can be understood to be a largely difficult exercise as it is difficult to
identify the different costs as available separately and the robust systems will be required to be
adopted accordingly.
Moreover, for the overall functioning of the business it becomes crucial to understand
that, the impact of this new legislative AASB 16 will be on the overall financial metrics as well
because the gearing ratio of an organization seeks to fall down considerably. In addition to this, it
is also crucial to understand that the EBITDA will tend to improve as the rent expenses will be
replaced by the overall depreciation and interest expense (AASB 2015). In line of this, it
becomes considerably crucial to understand that this will be impacting the covenants, credit
rating as well as the borrowing costs. Additionally earn out clauses and employee bonus schemes
are also impacted.

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The changes brought about in the AASB 16 will also impact the overall business
practices of the firm as well and hence, it can be stated that it shall become very essential for the
different businesses to ensure that, they are able to keep a track of the changes which will then
assist the to adopt them and improve the overall operations(Sacarin 2017). Moreover, an
understanding of the standard will also assist the business to keep the different audit committees,
boards and different shareholders as well as analysts well informed about the overall impact of
the new standard.
Effectiveness of IASB and related view
The IFRS 16 can be considered to be an International Financial Reporting standard which
can be understood to be a comprehensive model for the identification of the lease arrangements
as well as bring about the treatment of the financial statements of both the lessors as well as the
lessees (Lin, Yang and Wang 2018). The new IFRS tends to eliminate nearly all the off balance
sheets as present for the lessees and impacts the most commonly used financial metrics like the
financial ratios and the interest before tax (You 2017). It also comprises of considerable changes
which makes it very easy for the outsiders to compare the overall performance of the different
companies. It tends to have an overall impact on the performance of different ratios like the
credit rating, borrowing costs and the overall perception of stakeholders.
It can be considered crucial for the business to ensure that, it is able to adopt the IFRS 16
which tends to determine the manner in which the future of the company shall be shaped
(Knechel, and Salterio 2016). In order to ensure that, the firm is able to adopt and approach the
complexities of IFRS 16 compliance, the business will be required to adopt technologies relating
to adoption of an asset or contract management solution which will provide the firm with
adequate overall performance management solutions.

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Hence, it can be considered very relevant for the overall business enterprises, to ensure
that they are able to prepare themselves (Groomer and Murthy 2018). The regulation will have a
strong impact on the amount of debt which is generally written on the balance sheets of the
different firms and may impact organizations like the manufacturing equipment, aircrafts, the
trains as present and the technology as well. Hence, due to this, the business leaders would be
required to re-negotiate them upon their overall deals and may want to engage in the purchase of
the asset rather than the extension.
Reason why the implementation of the AASB 16 may have an impact on the purchase or
lease of the assets.
The new incoming accounting standard can be understood to have a considerably
significant impact on the overall financial statements of the different businesses. The AASB has
brought about and made considerable changes in accounting with the AASB 16 leases and
removed the distinction between the finance as well as operating leases and most of them
reflected on the balance sheet (AASB 2015). With respect to this, the new leasing standard will
have a considerable impact on each business and hence, the different businesses will be required
to be prepared. Under the current accounting standard and related obligation, any business would
be required to ensure that the future payment made under the operating lease arrangement shall
not be included in the sheets due to the realization of the payment (Griffiths 2016). However, as
per the new convention, they will be required to include the lease liability and the right use of the
asset on the balance sheet.
In other words, the businesses will now be required to include the cost of the leased asset
and the associated benefits on the balance sheet. Moreover the changes made in the AASB 16
will provide an accurate representation of the financial position of the business and hence,

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provides a clear image of the firm to the stakeholders as well (Furnham and Gunter 2015). It
needs to be understood that, the particular changes will bring about and increase the overall
commercial and financial reporting risk given the complexity of the industry and other related
issues. When the particular asset will be required to purchase the assets as this will help them to
have a relief on the interest costs and reduce the liabilities which will be reflected in the financial
statements as present. It is for this reason that the different businesses in order to reduce the
interest lease cost and to reduce their overall liability, will be required to reduce the costs and the
purchase of the assets will bring about the overall profitability of the firm.
Key disclosures made by the Woolworths with respect to the overall accounting for lease
and their transition from the AASB 16 to AASB 117.
The annual report of the Woolworths organization has mentioned that as the AASB 16
leases will be replacing the existing accounting requirements for the leases under the AASB 117
(Brumm and Liu 2019). Under the present requirement, the leases are generally classified based
on their nature either as a finance lease or as a consolidated statement of financial position.
Moreover, it can be considered more important for the firm to also consider the operating leases
which are generally not analysed under the consolidated statement of financial position.
In a similar manner, the reports state that, under the AASB 16 leases, the group
accounting for the operating leases as a lessee will result in the overall recognition of the right to
use and will give rise to an associated lease liability on the statements of the firm. This lease
liability will be representing the, present value of the future lease payments with the only
exception of the short term as well as the low value leases (Byrnes et al. 2018). It has to be
understood that the Woolworths report mentions that an interest expense shall be recognised
adequately on the lease liabilities and a depreciation charge shall be raised on the ROU assets.

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Moreover, along with this, there shall also exist a requirement for the firm to make additional
disclosure requirements under the new standard as possible. As a lessor, the overall leases for the
firm remains unchanged.
The implementation project made certain changes in setting the overall accounting policy
and did finalise a 2018 impact statement as well as budgeting and costing of the transition and
ongoing compliance which identified the data and system requirements in the same manner. The
members of the firm involved the members from treasury, property functions as well as the Chief
Financial officer (Wooworthsgroup.com.au 2019).
Transition
The overall transition will be applied on July 1st on 2019. They will be making use of the
modified retrospective approach. Hence, it can be largely understood that, the cumulative effect
of adopting the standard will be recognised as the overall adjustment and will be added to the
opening balance of the firm (Alles et al. 2018). The group shall make a decision on whether they
will be required to make a lease by lease basis and hence, the overall impact on the operations of
the firm.
Conclusion
Therefore, from the given section it can be rightfully understood that, the AASB can be
stated to be a board which comes up with various standards as well as policies which may have a
long impact on the firm. In line of this, it needs to be understood that the AASB 16 has brought
about considerable changes on the overall operations of the different firms. The report has
analysed the transition from AASB 117 to AASB 16 and mentioned the case of Woolworths and
the manner in which they have adopted the change.