Advance Financial Accounting Report: Lease Accounting for Myer and NAB

Verified

Added on  2020/05/28

|7
|1422
|83
Report
AI Summary
This report provides an in-depth analysis of the lease accounting practices of Myer and National Australia Bank, two prominent Australian companies, under the guidelines of AASB 16 (Australian Accounting Standards Board) and IFRS 16 (International Financial Reporting Standards). The report begins with an introduction to Myer and NAB, outlining their core business operations and objectives. The discussion section delves into the specifics of AASB 16, detailing how companies are required to recognize operating leases on their balance sheets by measuring lease liabilities and right-of-use assets. The report highlights the importance of using implicit interest rates or incremental borrowing rates for lease payments, and the application of the cost model for measuring right-of-use assets. It also emphasizes the disclosure requirements of the standard, ensuring transparency in financial statements. The report then examines how Myer and NAB specifically account for their leases, including the treatment of operating lease payments, lease incentives, and the classification of leases as operating or finance leases. The conclusion summarizes the key findings, reiterating the impact of AASB 16 on the financial statements of both companies, including the recognition of lease liabilities and right-of-use assets. The report concludes that both companies comply with AASB 16 in their lease accounting practices.
tabler-icon-diamond-filled.svg

Contribute Materials

Your contribution can guide someone’s learning journey. Share your documents today.
Document Page
Running head: ADVANCE FINANCIAL ACCOUNTING
Advance financial accounting
Name of the student
Name of the university
Author note
tabler-icon-diamond-filled.svg

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
1ADVANCE FINANCIAL ACCOUNTING
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Conclusion..................................................................................................................................4
Reference....................................................................................................................................6
Document Page
2ADVANCE FINANCIAL ACCOUNTING
Introduction
Myer is the department store based in Australia incorporated in 2006. Their
department store network involves the footprint of more than 60 stores in Australian retail
stores. The merchandise categories of Myer includes different product categories like
menswear, women’s wear, children’s wear, beauty products, cosmetics are few to be named.
The company is ranked at 145 among the top 2000 Australian companies. Majority of income
for the company is generated through department stores in the Australian industry. The main
objective of the company is to provide superior speciality services through creation of mutual
rewarding relations with their customers through open, safe and inspiring environment
(Myer.com.au 2018).
On the other hand, National Australia Bank is the leader in delivering the bank
services to the Australian businesses. They are specialists and expert in heath, education,
government, community banking and agribusiness. Their main objective is to become the
most respected bank in New Zealand and Australia. Majority of the bank’s business for
financial services are operated in New Zealand and Australia with the other business being
located in US, UK and Asia. The relationship of the bank with the customers are depended on
the principles of advice, guidance and help for achieving better financial results for the
customers (NAB.com.au 2018).
Discussion
AASB 16 and IFRS 16 deal with the lease treatment. As per the standard the
companies are required to bring majority items under operating lease to record in the balance
sheet of the company. The lessee shall measure the liability of lease at commencement date at
present value of lease payments that are unpaid as on that date (Holland 2016). Further, the
Document Page
3ADVANCE FINANCIAL ACCOUNTING
lease payments must be discounted through the implicit interest rate, if determined. However,
if the rate is not determinable the incremental borrowing rate of the lessee shall be used by
the lessee. However, after the date of commencement, lessee must measure right of use the
asset through application of cost model (Xu et al. 2017). Further, for application of the cost
model, the lessee shall measure right of use at cost reduced by the accumulated depreciation
and impairment losses, if any and shall be adjusted for the measurement of lease liability, if
any. Further, as per the disclosure requirement of the standard, the information shall be
disclosed through notes together with information delivered in the balance sheet, cash flow
statement and profit and loss account (Wong, Wong and Jeter 2016). These statements give
the clear idea regarding the impact that leases may have on financial performance, financial
position and the cash flows of lessee.
Looking into the financial statement of Myer, it is identified that the payments
towards operating lease are accounted for as an expense under the income statements of the
company on straight-line method over the term of lease. Further the lease contributions or
lease incentives from operating lease are accounted for as deferred income and is reversed on
straight line basis over lease term. The increase of fixed rate to the lease payment without
taking into consideration the index or contingent based increase in rents are accounted for on
straight line method over lease term. A liability or asset is accounted for the difference among
the paid amount and expenses of lease is recognized as income on straight line method. The
improvements on account of leasehold properties are amortised over period of lease or
expected useful life of the asset for improvement, whichever is less. Further, the provisions
for leases are written back partially to the provision of lease rental increase that is fixed.
Actual payments for lease can be varied with the amount provided as provision where any
alternative uses of the assets are found that includes the new tenant’s attraction. Majority of
the company’s warehouses and stores under the operating leases that is non-cancellable are
tabler-icon-diamond-filled.svg

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
4ADVANCE FINANCIAL ACCOUNTING
leased for 1 to 30 years of time. Further the key judgements for leases adopted by Myer is
that the company classifies the leases as operating leases and financial lease based on whether
the company holds all the rewards and risk associated with the ownership or not. While
making the assessment, the company primarily considers the ownership on asset only after
the completion of lease term (Dakis 2016). However, the reported commitments for lease do
not include the rent that was treated as contingent at the inception of lease. The impact of the
exclusion with regard to the reported commitments for lease is not considered as material
fact.
Looking into the annual report of NAB, it is identified that rents from operating lease
are charged in the income statement on straight-line method over the term of lease. However,
if the operating lease is terminated prior to the lease period end then whatever payment is
made to lessor through penalty is recorded as expense under the income statement in the year
of termination (Joubert, Garvie and Parle 2017). Further, the incentives from lease are
recorded as the integral part of total expenses for lease over the term of the lease.
Further, both the companies accounts the leases for equipment, plant and property
under which the considerable portion of rewards and risks are retained with the lessor are
considered as operating lease. On the other hand, leases under which the company retain
considerably all the rewards and risks of the ownership are considered as finance lease
(Wong and Joshi 2015).
Conclusion
It is concluded from the above discussion that both the companies follow AASB 16
for treating their leases. As per the standard all the liabilities and assets under leases for more
than the term of 12 months are recognized in the financial statements unless the asset has
very low value. Further, the lessee recognize the right-of-use asset as the company’s right for
Document Page
5ADVANCE FINANCIAL ACCOUNTING
using the asset and the lease liability as the obligation for lease payment. Further, as per
AASB 16, both the companies will show the present value of the obligation as liability under
balance sheet along with the asset available under right-of-use. Further, the income statement
will be classified for the expenses associated with occupancy as interest expenses and
amortisation.
Document Page
6ADVANCE FINANCIAL ACCOUNTING
Reference
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
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. Journal of New Business Ideas and Trends, 15(2), pp.1-11.
Myer.com.au., 2018. Home. [online] Available at: https://www.myer.com.au/ [Accessed 26
Jan. 2018].
NAB.com.au., 2018. Home. [online] Available at: http://www.nab.com.au/ [Accessed 26 Jan.
2018].
Wong, J., Wong, N. and Jeter, D.C., 2016. The Economics of Accounting for Property
Leases. Accounting Horizons, 30(2), pp.239-254.
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and
key ratios: Evidence from Australia. Australasian Accounting Business & Finance
Journal, 9(3), p.27.
Xu, W., Xu, W., Davidson, R.A., Davidson, R.A., Cheong, C.S. and Cheong, C.S., 2017.
Converting financial statements: operating to capitalised leases. Pacific Accounting
Review, 29(1), pp.34-54.
chevron_up_icon
1 out of 7
circle_padding
hide_on_mobile
zoom_out_icon
logo.png

Your All-in-One AI-Powered Toolkit for Academic Success.

Available 24*7 on WhatsApp / Email

[object Object]