Accounting Standard and Governance: AASB 16 Leases Report

This report comprehensively examines the impact of the new lease standard, AASB 16, on financial statements, focusing on the accounting changes, advantages, and disadvantages. It begins with an introduction to the standard and the reasons for its implementation, emphasizing the shift from operating to finance leases and its implications for lessees. The report then analyzes the advantages and disadvantages of AASB 16 for BlueScope Steel Limited and Boral Limited, including the impact on their income statements, balance sheets, and cash flow statements. It also includes a summary of the environmental and social aspects of these companies and evaluates the usefulness of AASB 16 to financial statement users, providing insights into the changes in financial metrics, disclosures, and the potential impact on key ratios such as EBITDA and debt-to-equity ratios, as well as the implications for cash flow. The report concludes with a summary of the key findings, highlighting the importance of understanding and adapting to the new standard for accurate financial reporting and decision-making. The report also mentions the impact on the environmental reporting and carbon emissions of the companies, and assesses the companies' efforts to comply with regulatory requirements.

Running head: ACCOUNTING STANDARD AND GOVERNANCE
Accounting standard and governance
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Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................3
Description of the reason of changing leasing standard:...........................................................3
Implication of leasing standard AASB 16:............................................................................4
Advantages and disadvantages of AASB 16 for BlueScope and Boral limited:....................4
Identification of impact of AASB 16 on the income statement, balance sheet and cash flow
statement of BlueScope and Boral limited:................................................................................6
Summarizing the report of environmental and social aspects of BlueScope and Boral limited:
....................................................................................................................................................8
Evaluating the usefulness of AASB 16 to the users of financial statement of companies:.......9
Summarizing the findings:.........................................................................................................9
References list:.........................................................................................................................11
Appendix:.................................................................................................................................13

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Introduction:
The report is prepared for demonstrating the evaluation of the new lease standard that
is AASB 16 on the financial statements of companies. The reason why the leasing standard
has changed and how the standard would change the reporting of the statements. In addition
to this, the advantages and disadvantages of the introduced standard have been presented. For
the purpose of analysis, the two companies have been chosen which includes BlueScope Steel
limited and Boral limited. Furthermore, the usefulness of AASB 16 to the users of financial
statements is evaluated. The objective of AASB 16 is to ensure that relevant information is
provided to the lessees and lessors in a manner which depicts faithful representation of the
transactions related to lease (Ey.com 2019). Such information is helpful to the financial
statement users as they are able to assess the impact of lease on different financial statements.
The reporting of the environmental and social aspect of the two companies and the existence
of any regulatory requirement governing such aspects is ascertained.
Discussion:
Description of the reason of changing leasing standard:
Substantial changes have been made to the lease accounting by AASB (Australia
accounting standard board). The obligation to make future payments under the current
accounting standard of lease is not presented in the balance sheet. However, the company is
committed to make payment of those future expenditures. The absence of the relevant
element of lease from the balance sheet is of great concern to the stakeholders because the
true financial position of the company is not accurately reflected (Pwc.com 2019). The lease
transactions concerning lease under the existing rules is accounted as finance or operating
lease depending upon the tests and complex rules and the use of bright lines result in nothing
being recognized in the statement of financial position of companies (Li and Yang 2015).

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One of the major flaws of the previous lease standard that has resulted in the introduction of
new standard is the incentives of company to classify the contracts as operating as the impact
of financial and operating lease is different and such treatment has major consequences on the
key financial ratios. The balance sheet and key financial rations would be heavily impacted
by the adoption of new standard for entities that has substantial amount of operating lease
(Aasb.gov.au 2019).
Implication of leasing standard AASB 16:
The new leasing standard is likely to affect almost all the business in every way and
such change would result in inclusion of the right of use asset and liabilities on the balance
sheet. For the lessees, the distinction between operating and financing lease is eliminated and
for all leases, there will be reorganization of lease liability and a new lease asset (Giner and
Pardo 2018). Therefore, the cost of using the leases assets and its associated benefits would
be reflected on the balance sheet. The financial statements would be more accurately
reflected as all the liabilities are fully reflected. Furthermore, the earning profiles of entities
would be impacted in the absence of straight line rental, expense and charging higher expense
in early years and less in later years. When determining the lease liability and the size of the
right to use asset, it would be required by the entities to have comprehensive evaluations of
the same (Aasb.gov.au 2019).
Advantages and disadvantages of AASB 16 for BlueScope and Boral limited:
The companies are positively as well as negatively impacted with the introduction of
new leas standard.
 With the inclusion of right to assets on the balance sheet will increase the total assets
value and enable the companies to qualify as large proprietary companies
(Goshunovaa and Kirpikovb 2016).

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 There would be increase in liabilities and assets of the companies adopting the
standard along with an increase in operating cash flow and decrease in financial cash
flow. Since, there would not be any change in underlying business activities and the
cash flow associated with it, there would be improvement in performance measures
such as EBIT, operating profit and EBITDA (Aasb.gov.au 2019).
Disadvantages for the companies:
 The change in financial metrics, liabilities and ratios of Boral limited and Bluescope
limited brought by the adoption of new standard would require them to take extra of
the disclosures to give an explanation of such shift. This could result in possible
breaching of the contracts and financial agreements both externally and internally
(Joubert et al. 2017).
 The existing lease of Boral limited and Bluescope limited might be renegotiated for
minimizing the impact of existing lease. The attractiveness of leasing might be
reduced because of increased administrative burden and elimination of off balance
sheet accounting (Wong and Joshi 2015).
 It would be required by the companies such as Boral limited to bring all the leases on
the balance sheet and the usage of spreadsheet might lead to error while feeding into
the financial statements and is cost inefficient (Pawsey 2017).
 There will be potentially large increase in metrics such as EBITDA and the expenses
would move below such metric value and that has a range of associated issue.
Identification of impact of AASB 16 on the income statement, balance sheet and cash
flow statement of BlueScope and Boral limited:
The new lease standard would have considerable impact on the financial statements
such as balance sheet, income statement and cash flow statement. The adoption of new

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standard by Boral limited and Bluescope limited is to remove rental cost that would result an
increase in the value of EBITDA which would create an impact on net profit before tax.
Since the lease obligation is greater at the beginning of lease under new standard, thus there
is greater amount of interest expenses being calculated (Morales and Zamora 2018).
Furthermore, the interest expenses would decrease with decrease in obligation over the term
of lease.
It has been found from the annual report of Boral limited that the initial estimates of
the lease liability and the additional right of use asset that would be recognized from July,
2019 is between $ 350 million and $ 350 million. It is expected that the profit before
EBITDA would increase by $ 10 million that is from $ 90 million compared to $ 100 million.
There would be increase in depreciation expense to $ 95 million as against $ 85 million. On
other hand, the net interest expense would increase approximately to $ 15 million compared
to $ 10 million. In addition to this, the profit before income tax would reduce to
approximately $ 5 million compared to $ 10 million (Boral.com 2019). Therefore, the
accounting impact on the income statement of Boral limited is that there would be higher
interest expense. It can be observed that the percentage of EBITDA to debt will increase after
the imposition of standard.
On other hand, the annual report of Bluescope limited do not disclose the estimates of
increased value of performance measures on the financial statements on an annualized basis.
However, an assessment has been carried out by the management of Bluescope about the
impact of new standard and has been found that the financial statements would be materially
impacted by such adoption. Such change involves change in the value of liabilities sand
assets reported in the balance sheet, a switch in earning categories to interest expense and
depreciation from operating expense, change in timing of recognizing of lease expenses and
an increase in gearing levels (Bluescope.com 2019). Such change will not have any cash

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effect on the group and thereby there would not be any impact on the cash flow statement.
However, it is mentioned by the group in the annual report that with the adoption of the
standard there would be carrying out of further assessments.
Since there will be increases liabilities and assets reported by both the organizations
after the adoption of the new standard because of recognizing lease obligations and leased
assets. The lease obligation would split into noncurrent and current portions and the right to
use lease assets is classified as noncurrent. This would create a negative impact on the current
and debt to equity ratio. It can be observed from the computation of ratios for Boral limited
that their current ratio would decline from 1.75 to 1.71 along with fall in debt to equity ratio
from 0.00043 to 0.0004. Since, it is mentioned in the annual report of Bluescope limited that
the cash effect of the group will not be impacted due to adoption of the standard, there would
not have any considerable impact on cash flow statement.
The increase in gearing ratios such as debt to equity and EBITDA/Debt would
increase the financial leverage of companies and implies that they are dependent on debt for
financing their business and may impact the credit ratings and behavioral changes in the
investors. Such affect may also trigger the loan covenants breaches (Goshunovaa and
Kirpikovb 2016).
Summarizing the report of environmental and social aspects of BlueScope and Boral
limited:
The manufacturing operations of Bluescope in Australia are subjected to
environmental reporting and the annual report of the company presenting their environmental
performance is submitted under the energy reporting and natural greenhouse scheme. The
group is subjected to extensive regulations and laws of government including greenhouse gas
emission, environmental and occupational safety and health. From the analysis of the annual

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report, it has been found that the company is a participant of uncapped emission trading
scheme of New Zealand and has reported the total volume of carbon emission. The liability
of emission is measured at the emission unit carrying amount and is recognized as carbon
provision. Moreover, the carbon provision and the emission unit asset are derecognized from
the financial statement when they are delivered to the third party or government
(Bluescope.com 2019).
There are broad range of safety, health and environmental laws which the activities of
Boral are subjected to. Boral limited take continuous efforts to reduce the future cement
related carbon emission and the annual report presents the total amount of carbon that is
emitted by the activities of business. The biggest role of Boral in addressing the
environmental concern is lowering the CHG emission associated with the production of
cement in their supply chain. The organization strengthens the internal control by improving
their compliance with the increasing stringent regulatory requirements (Boral.com 2019).
Moreover, the aim of the organization is to support the sustainable social and economic
development in the communities by raising awareness of wellness and health issues.
Evaluating the usefulness of AASB 16 to the users of financial statement of companies:
The criticism faced by the previous lease standard is addressed with the introduction
of AASB 16 as most of the leases are presented in the balance sheet for providing the users
with enhanced disclosures. Such enhanced disclosure would result in more faithful
representation of assets and liabilities of lessees and thereby greater transparency of leasing
activities and greater transparency of financial obligations of lessees. The increased
disclosure would enable to users to assess the effect that lease would have on the financial
performance, financial position and lessee cash flow. Such assessment would help in meeting
the needs of users of financial statements. Therefore, it can be inferred that the adoption of

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AASB 16 would be useful to investors as it helps in fulfilling their information needs.
However, there are some criticisms associated with the new lease standard because of
increasing administrative burden, change in process and control, implementation of new IT
system and increase in expense (Chen and Zhang 2018).
Summarizing the findings:
From the analysis of the above facts and features of the new lease standard, it can be
inferred that such standard have been introduced for addressing the criticism of the previous
leas standards. Introduction of AASB 16 would have considerable influence of several
financial metrics and thereby would impact the financial performance and position of the
business. The analysis of annual report of Bluescope and Boral limited, it has been found that
Boral limited has disclosed the estimated change in few financial metrics due to AASB 16 as
against Bluescope. However, both the organization has demonstrated the possible impact of
AASB 16 on the different financial metrics. In addition to this, both the organization
complies with the environmental rules and regulation and report about their carbon emission
and efficiency. Therefore, the adoption of the new standard would positively impact the users
of financial statements as the assessment of financial performance companies are enhanced
due to availability of relevant and transparent information concerning lease activities.

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References 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].
Akbulut, D.H., 2017. The Effects of Operating Leases Capitalization on Financial Statements
and Accounting Ratios: A Literature Survey. In Regional Studies on Economic Growth,
Financial Economics and Management (pp. 3-10). Springer, Cham.

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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/Boral-Annual-Report-
2018.pdf [Accessed 19 Apr. 2019].
Chen, B. and Zhang, X., 2018. If Leases are not Capitalized: The Effects of a Qualified Audit
Opinion on Investors’ Judgments and Decisions. Journal of Accounting and Finance, 18(2),
pp.200-212.
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].
Giner, B. and Pardo, F., 2018. The Value Relevance of Operating Lease Liabilities:
Economic Effects of IFRS 16. Australian Accounting Review, 28(4), pp.496-511.
Goshunovaa, A. and Kirpikovb, A., 2016. Modeling of accounting policies as a tool of
management of corporate financial performance. Academy of Strategic Management
Journal, 15, pp.76-82.
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.
Li, X. and Yang, H.I., 2015. Mandatory financial reporting and voluntary disclosure: The
effect of mandatory IFRS adoption on management forecasts. The Accounting Review, 91(3),
pp.933-953.

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Morales Díaz, J. and Zamora Ramírez, C., 2018. IFRS 16 (leases) implementation: Impact of
entities’ decisions on financial statements. Aestimatio: The IEB International Journal of
Finance, 17, 60-97.
Pawsey, N.L., 2017, June. IFRS adoption: A costly change that keeps on costing.
In Accounting Forum (Vol. 41, No. 2, pp. 116-131). Taylor & Francis.
Potter, B., Pinnuck, M., Tanewski, G. and Wright, S., 2019. Keeping it private: financial
reporting by large proprietary companies in Australia. Accounting & Finance, 59(1), pp.87-
113.
Pwc.com. (2019). [online] Available at: https://www.pwc.com/gx/en/services/audit-
assurance/assets/ifrs-16-new-leases.pdf [Accessed 19 Apr. 2019].
Stuchbery, T.V., 2017. The Reporting Entity Concept in Australia: An Exploration of the
Impact and Comparison to International Standards (Bachelor's thesis, Università Ca'Foscari
Venezia).
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and
key ratios: Evidence from Australia. Australasian Accounting, Business and Finance
Journal, 9(3), pp.27-44.

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Appendix:

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Boral limited ratios
Boral limited 2018 2019 (estimated
value)
EBITDA 1056 1146
Debt 2.45 2.28
EBITDA/Debt 431.02 502.63

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Current assets 1738.3 1738.3
Current
liabilities
995.2 1014.4
Equity 5730.8 5730.8
Current ratio 1.75 1.71
Debt to equity 0.0004
3
0.00040