Accounting for Leases: A Comparison of AASB 117 and IFRS 16 Standards

This business report provides a comprehensive comparison of AASB 117 and IFRS 16 accounting standards, specifically focusing on the accounting treatment of leases. The report begins with an overview of AASB 117, the Australian Accounting Standards Board's standard for lease accounting, and defines key terms such as finance and operating leases. It then contrasts AASB 117 with IFRS 16, highlighting the differences in balance sheet presentation, lease classification, and income statement recognition. The report analyzes the impact of IFRS 16 on a company's financial reporting, particularly for Genworth Mortgage Insurance Australia Limited, discussing the changes to assets, liabilities, and profit and loss. Furthermore, it offers recommendations for Genworth's management on transitioning to the new standard, including evaluating lease inventories, analyzing lease contracts, modeling the impact on financial statements, and communicating the changes to stakeholders. The report also includes a press release and descriptions of leased assets and the company's changeover process to the new accounting treatment under IFRS 16, providing insights into the practical implications of the standard.

Accounting Theory
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Contents
Business Report..........................................................................................................................3
AASB 117 Leases...................................................................................................................3
AASB 117 and IFSR 16.........................................................................................................5
Recommendations..................................................................................................................7
Press release...............................................................................................................................8
Description of leased Assets...................................................................................................8
Company`s changeover to the new accounting treatment which is requisite as per IFSR 16
Leases.....................................................................................................................................9
References................................................................................................................................10
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Business Report
This business report, comprehends a brief detail about the AASB 117 which is an accounting
standard made by the Australian accounting standard board. In addition to this, a comparison
between AASB 117 and the IFSR 16 in context to the accounting based treatment for leases
is also discussed, in order to clarify the both accounting standards (Henderson, Peirson, &
Herbohn, 2015). This report also embraces the impact of the changes because of the new
accounting standard i.e. IFSR 16 on financial reporting. The business report is prepared by
considering the, Genworth Mortgage Insurance Australia Limited, which is engaged in the
business of loan mortgage insurance.
Some recommendations are also being provided to the management of Genworth Ltd.
regarding the practice of the new accounting standard for accounting treatment of leases: so
that, the business processes shall be continued without any legal interruption that could be
occurred due to the negligence of practicing accounting standard while preparing financial
statement of company.
AASB 117 Leases
The Australian Accounting Standard Board made an accounting standard on 15th July, 2004;
i.e. AASB 117, in regards to the accounting treatment of leases. This accounting standard
comes under Corporation Act 2001`s section 334 (Clarke, 2012). The main objective of the
AASB 117 is to set some guidelines for the lessor as well as lessee in context to the
applicable policies of accounting and disclosure which shall be applied in context to the
leases.
A lease can be defined by considering the AASB 117, as an agreement which encloses the
right to use an asset conveyed by a lessor, to a lessee for a fixed or specific time period in
return for a compensation or series of payment (Freeman & Freeman, 2015).
 Lessor is the one, who owns or possess the asset. Asset`s legal title is retain by the
lessor. Payment is used to be received by the lessor for conveying the right to use the
asset to the lessee.
 On the other hand, lessee gets authorized to use the asset with a right, however,
payment shall be made to the lessor by the lessee for such authorization.
The AASB 117, standard is applied to all the leases apart from- licensing agreements for
items, such as, copy rights and patents, video recordings, motion pictures and play
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manuscripts; and the leases to use or explore for natural gas, oil, minerals and similar
regenerating resources (Mills & Woodford, 2015). In addition to this, the standard cannot be
applied as a basis of measurement for-
1. Investment property as well as biological assets provided by lessor subsequently,
under operating leases.
2. Asset apprehended by lessees which is accounted for as an investment property.
The transactions in context to the leases are used to be recorded in following way:
The finance and operating lease is recorded in the books of accounts of Lessee as-
Type of lease Transaction Debit
(Dr.)
Credit
(Cr.)
Finance Lease Lease asset 
Lease Liability 
Operating Lease Lease Expense 
Cash 
Recoding of finance and operating in the books of accounts of Lessor
Type of lease Transaction Debit
(Dr.)
Credit
(Cr.)
Finance Lease Lease receivable
(Asset)

PPE (Asset) 
Operating Lease Cash 
Revenue 
Finance Lease and Operating Lease
A lease can be categorized as finance lease, as when the agreement of lease, transfers
substantially all the rewards as well as risks incidental to ownership. In contrast to this, a
lease can be categorized as operating lease, as when the lease agreement do not transfers
substantially all the rewards and the risks incidental to ownership.
Company`s income statement:
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(Source-
http://member.afraccess.com/media?id=CMN://2A845303&filename=20150227/
GMA_01603637.pdf)
The above leases are included as operating leases. There is variation in terms, renewal rights
and escalation clauses of leases. The payment of lease are identified as an expenditure in
statement of profit and loss on basis of straight line on the duration of such leases.
AASB 117 and IFSR 16
Comparison between AASB 117 and IFSR 16 in lessee`s perspective:
On basis of IFSR 16 AASB 117
Balance sheet The capitalise present value
of payments for lease are
regarded as an asset
Finance lease are
represented on the balance
sheet. Whereas operating
leases are regarded as off-
balance sheet (Marsden,
2010).
Classification No classification of leases;
Unitary model of accounting
(Poppleston, 2017)
Leases are categorised as
operating leases and finance
leases
Income statement The operating lease expense
are replaced by lease
expense and depreciation
charge
Recognition of operating
lease expense through a
straight lie basis
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Impact of IFSR 16 on company`s financial reporting
IFSR 16 is a new accounting standard which is enforced to disregard the off-balance sheet
financing. The application of the new accounting standard i.e. IFSR 16 will put an impact on
Genworth`s financial statement (Rahman, 2016). According to this standard, the lease
liability will be categorized as a financial liability; as a result, it will impact on the financial
indebtedness, convents and ratios in the balance sheet. Changes on the company`s balance
sheet will be in such a manner-
Asset- Assets of lessee will be increased by the amount of operating issues. Beside this, an
exemption will also be there; underlying assets of low value or lease term of one year or less
and.
Liabilities- The liability of the lessee will also be increased by the amount of their binding
obligations mentioned within the agreement of lease as in case it is a financial liability.
Profit and Loss- As a replacement for of the expenses on lease, 2 items of expenses will be
recognized by the lessees in the profit and loss statement; the expense on interest under lease
liabilities and depreciation of the right of use asset.
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Recommendations
Company is being recommended to changeover its old mechanism for accounting treatment
of leases as per the guidelines of the new accounting standard IFSR 16 Leases standard. As
when this accounting standard will be practiced then the Genworth Ltd. will have to make
certain changes, for instance, the company shall replace its accounting model in a single
accounting model by disregarding the dual accounting model (Greite, 2013). This means,
company shall lays emphasis on unitary model of accounting and do not made distinction in
operating lease and finance lease. Recommendations for the company are as follows:
 The management of the Genworth ltd. shall evaluate the inventory of leases to assess
the totality. If the information is not recorded by the management about the leases,
then it is mandatory for company to capture all the requisite information and maintain
a comprehensive list of lease documentation.
 Analysis of lease contracts shall be considered by the company to define their
accounting and classification under IFSR 16. Legal opinions could be considered by
management for such analysis (Shaw & Wild , 2015).
 It is also recommended to the company to model the provisions of standards on
company`s earning profile and balance sheet. In addition to this, the impact of such
model shall be analysed on financial pacts.
 It must be considered by the management to plan for communicating the impact of
practicing IFSR 16 on business processes and the related information to the banks,
analysts and investors.
 The IT system of the company shall also capture the comprehensive details of the
lease.
 It is recommended to the management to consider the renewal options of leases
besides the pricing and terms of conditions (Poppleston, 2017).
 The impact of IFSR 16 will not only be on finance but also on other business
processes as well. Hence it is recommended for the company to involve its legal,
procurement and IT to carry out the practice of new standard for leases and the
training plans as well as communication of the impact shall be considered in effective
manner.
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Press release
Description of leased Assets
Company`s balance sheet
The adoption of IFSR 16 has resulted as increase in liabilities and material assets
Company`s lease expense profile is given below:
The above image, depicts the lease expense profile in context to the application of IFSR 16
and AASB 117 over leases. Amortization of assets is being done on the basis of straight line
method. The expenses on leases ascertained in profit or loss over the term of lease under
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AASB 117 and IFSR 16 is the same. Though the pattern of ascertain the expenses related
with lease is different as illustrated above.
Company`s changeover to the new accounting treatment which is requisite as per IFSR 16
Leases
The company will carry out the accounting treatment of leases as per the guidelines of the
new accounting standard i.e. IFSR 16 Leases. An effective project governance will be
considered in preparing for the changeover to the new accounting standard. For that reason,
representatives or head of the following department of the company will be involved in
palling and discussion-
Operations
Tax
Information technology
Procurement
Investor relations
Finance/Accounting
Property/ Real estate; and
Treasury
It is important to involve all these department`s representatives in the planning and
establishment of the new standard of accounting, as this standard will not only put its impact
on the finance department but also on other business operations. The practicing of unitary
model of accounting will be laid emphasis by and operating lease as well as finance lease will
also not be regarded as two different leases (Dagwell, Lambert, & Wines, 2012). All the
requisite information about the leases will be documented by the company so that this
information could be used further while accounting treatment of the leases. In addition to this,
the lease contract`s detail will also be documented and so that their classification and
accounting could be done as per the IFSR 16. Legal opinion would also be taken regarding
the practicing of the new standard (Rahman, 2016). The impact of the practicing of the new
standard i.e. IFSR 16 will be communicated to the company`s stakeholder (investors,
analysts, bank etc.) so that they could be known of the facts and the related required
information will also be disclosed to them.
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References
Clarke, E. (2012). Accounting: An Introduction to Principles + Practice. Cengage Learning.
Dagwell, R., Lambert, C., & Wines, G. (2012). Corporate Accounting in Australia. Pearson.
Freeman, S., & Freeman, J. (2015). Financial Accounting: A Practical Approach. Pearson
Higher Education AU.
Greite, S. (2013). The Development of the Australian Accounting Standards After the End of
the G4+1. Grin Verlag.
Henderson, S., Peirson, G., & Herbohn, K. (2015). Issues in Financial Accounting. Pearson
Higher Education AU.
Kimmel, P. D., & Weygandt , J. J. (2013). Accounting Principles.
Marsden, S. (2010). Australian Master Bookkeepers Guide [2009/10]. CCH Australia
Limited.
Mills, A., & Woodford, W. (2015). Company Accounting. Cengage Learning.
Poppleston, R. (2017, 1 30). IFRS 16, Leases. Retrieved from www.ownet.co.uk:
https://ownet.co.uk/ifrs-16-leases-implementation/
Rahman, A. R. (2016). The Australian Accounting Standards Review Board. Routledge.
Shaw, K., & Wild , J. (2015). Fundamental Accounting Principles. Wiley.
Warren, C. S., & Reeve, J. M. (2017). Accounting. South-Western College Pub.
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