AASB 16 Leases: Impact on Wesfarmers Limited Financial Reporting

This report examines the financial reporting disclosures of Wesfarmers Limited, focusing on the impact of the new lease accounting standard AASB 16/IFRS 16. It details Wesfarmers' existing lease accounting practices and analyzes how the adoption of AASB 16 will affect the company's financial position and performance. The report evaluates whether AASB 16 improves financial reporting by providing a more accurate representation of lease liabilities and assets on the balance sheet. It also offers recommendations for Wesfarmers to prepare for the adoption of the new lease standard, including project governance, readiness assessment, data gathering, and consideration of communication impacts. The analysis concludes that AASB 16 will initially affect Wesfarmers' financial position due to increased debts and complexities in lease treatments but will ultimately lead to more transparent and informative financial reporting for investors. Desklib offers this and many more solved assignments for students.

Running head: FINANCIAL REPORTING DISCLOSURES
Financial Reporting Disclosures in the Australian Corporate Sector
Name of the Student
Name of the University
Author’s Note

1FINANCIAL REPORTING DISCLOSURES
Executive Summary
This report sheds light on the existing as well as upcoming lease accounting standard in Australia
in relation to Wesfarmers Limited. This report shows the existing lease accounting in
Wesfarmers along with the potential effects of the adoption of new lease accounting standard,
AASB 16/IFRS 16 on the financial situation and performance of the company. The report also
shows how the adoption of new lease accounting framework will improve financial reporting.

2FINANCIAL REPORTING DISCLOSURES
Table of Contents
Introduction......................................................................................................................................3
Description of Leases in Wesfarmers and Details of AASB 16 or IFRS 16...................................3
Impact of New Lease Standards on the Performance of Wesfarmers.............................................4
Evaluation of Whether AASB 16 or IFRS 16 Improves Financial Reporting................................4
Conclusion and Recommendations..................................................................................................5
References........................................................................................................................................6

3FINANCIAL REPORTING DISCLOSURES
Introduction
It is needed for the business organizations to comply with the required accounting
standards and regulations in the process of financial reporting. In this process, it is their
responsibility to consider the revised accounting standards and regulations in different aspects of
financial reporting (Nobes 2014). In Australia, the Australian Accounting Standard Board
(AASB) has introduced the new and revised lease standard that is AASB 16 or IFRS 16. The
main aim of this report is the lease accounting of Wesfarmers Limited.
Description of Leases in Wesfarmers and Details of AASB 16 or IFRS 16
It can be observed from the 2018 Annual Report of Wesfarmers that the company has
recorded about the operating leases in the notes to the financial statements under Commitment
and Contingencies. Wesfarmers has three types of operating leases; that are leases within one
year, leases greater than one year but less than five years and leases more than five years
(Wesfarmers.com.au 2018). The amount of leases less than one year in 2018 and 2017 is $2323
million and 2417 million respectively. The amount of lease commitments more than one year by
less than five year is $ 7618 million in 2018 and $7989 million in 2017. The amount of leases
more than five years is $8432 million and $9159 million in 2018 and 2017. The total operating
lease commitments of Wesfarmers for 2018 and 2017 are $18373 million and 19565 million
respectively (Wesfarmers.com.au 2018).
As per the annual report, Wesfarmers does the recognition of finance and operating leases
based on the fact that whether they possess risks and rewards related to the ownership of leased
assets. The company does not include rents under the classified leases. In 2018, Wesfarmers has
recognized the operating lease payments as an expense in the income statement on straight-line
basis over the term of lease. The company has recognized the incentives for operating leases as a
liability (Wesfarmers.com.au 2018).
AASB 16 Leases or IFRS Leases: With the help of this revised standard, AASB has introduced
a single model for lease accounting and it puts the obligation on the lessees to recognize all
leases as assets and liabilities with a term of more than 12 months. Thus, the requirement for the
lessees is to recognize a right-to-use asset and a lease liability that provides the lessees with the

4FINANCIAL REPORTING DISCLOSURES
right to use the assets and liabilities for making the lease payments. The companies will be
required to treat the right-to-use asset as other financial aspects that need to be depreciated
(iasplus.com 2018).
Impact of New Lease Standards on the Performance of Wesfarmers
It needs to be mentioned that the new lease standers will have major impact on the
financial performance and position of Wesfarmers. After the application of AASB 16 in the
current lease contracts of Wesfarmers, the present value of these lease commitments would be
shown as liability in the statements of financial position with assets that represent right-to-use
(Wesfarmers.com.au 2018). Hence, the increase in the liability would degrade the financial
position of the company. At the same time, Wesfarmers will be needed to split the occupancy-
related expenses between amortization and interest expenses. Thus, the increase in the expenses
will negatively affects the profitability of Wesfarmers (Wesfarmers.com.au 2018).
Leasing the real estate is a major activity of the retailers like Wesfarmers. In the presence
of new lease standard AASB 16, Wesfarmers may need substantial judgment at the time to
determine and reassess economic incentives for renewing retail lease locations (Dimitropoulos et
al. 2013). At the same time, Wesfarmers will be needed to implement systems for the estimation
and re-measurement of variable payments that are linked with index at the spot rate for every
reporting period. In addition, Wesfarmers will be needed to split service charges from the
elements of lease. On the overall basis, AASB 16 will initially affect the financial position and
performance of Wesfarmers due to increase in debts, expense and complexities in lease
treatments (pwc.com 2018).
Evaluation of Whether AASB 16 or IFRS 16 Improves Financial Reporting
As per the above discussion, the new lease standard will lead to the inclusion of a lease
liability and right to use asset on the balance sheet. It implies that the companies will have to
include the costs for using lease assets along with the benefits in the balance sheet. This will
contribute towards more exact representation of financial position of the companies as it will
reflect all the liabilities so that the investors can get the useful information about the companies.
At the same time, it will lead to more integration between the business departments related to

5FINANCIAL REPORTING DISCLOSURES
lease agreements (Verriest, Gaeremynck and Thornton 2013). The main objective of the general
purpose financial reporting (GPFR) is to provide the investors with the required financial
information for decision-making; and new lease standard will fulfill this objective of GPFR by
providing them with the useful information about lease commitments. In addition, as per the
qualitative characteristics of financial information, financial information must be relevant and
must be represented faithfully. The new lease standard will improve financial reporting by
including most relevant lease information for the investors. Additionally, adherence to this lease
standard will ensure the faithful representation of the financial information related to leases
(Müller 2014).
Conclusion and Recommendations
Based on the above discussion, some recommendations are provided below for
Wesfarmers to prepare for the adoption of the new lease standard:
i. There will be need of effective project governance for Wesfarmers for the adoption of
AASB 16 and thus, Wesfarmers will be needed to include representatives from different
departments in the adoption process like finance and accounting, operations,
procurements, IT, taxation, treasury and investor relations (deloitte.com 2018).
ii. Wesfarmers should conduct a readiness assessment to measure the level of challenge in
the AASB 16 adoption process.
iii. Wesfarmers needs to gather the required data for the adoption of AASB 16.
iv. In this process, Wesfarmers should take into consideration the effects as well as
communication impact in the adoption of AASB 16 (deloitte.com 2018).

6FINANCIAL REPORTING DISCLOSURES
References
Dimitropoulos, P.E., Asteriou, D., Kousenidis, D. and Leventis, S., 2013. The impact of IFRS on
accounting quality: Evidence from Greece. Advances in Accounting, 29(1), pp.108-123.
Iasplus.com. (2018). IFRS 16, Leases [Completed]. [online] Available at:
https://www.iasplus.com/en-ca/projects/ifrs/completed-projects-2/leases [Accessed 1 Oct. 2018].
Müller, V.O., 2014. The impact of IFRS adoption on the quality of consolidated financial
reporting. Procedia-Social and Behavioral Sciences, 109, pp.976-982.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Pwc.com. (2018). [online] Available at:
https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf [Accessed 1
Oct. 2018].
Verriest, A., Gaeremynck, A. and Thornton, D.B., 2013. The impact of corporate governance on
IFRS adoption choices. European accounting review, 22(1), pp.39-77.
Wesfarmers.com.au. (2018). Annual Report 2018. [online] Available at:
http://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-report.pdf?
sfvrsn=6 [Accessed 1 Oct. 2018].
Www2.deloitte.com. (2018). Leases: A Guide to AASB 16 [online] Available at:
https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-aasb-16-
guide-220916.pdf [Accessed 1 Oct. 2018].