HA3011: Advanced Financial Accounting Report on ASX Company

This report provides a comprehensive analysis of financial accounting principles and practices, focusing on the application of accounting concepts and the impact of the new accounting standard for leases, AASB 16. The report begins by identifying and describing key accounting concepts, such as the dual aspect, money measurement, accrual, going concern, and materiality concepts, as they are implemented by Costa Group Holdings Limited, an ASX-listed horticulture company. It then delves into the changes introduced by AASB 16, discussing the implications for the selected company and highlighting specific issues and complexities related to lease accounting. The analysis includes a discussion of the transition from AASB 117 to AASB 16, outlining the company's approach to compliance and the key disclosures made in its annual reports. The report examines how Costa Group Holdings Limited has recognized and disclosed leases under AASB 16, including right-of-use assets and lease liabilities. The report also considers the challenges faced in adopting the new standard, such as the need for comprehensive lease information, complex calculations, and changes in profit and expense recognition. The report concludes by summarizing the critical disclosures made by the company regarding its lease accounting practices, including the transition effects and implications for financial reporting. The analysis is based on the annual reports of Costa Group Holdings Limited and provides a practical understanding of financial accounting in the context of a real-world business.

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HA3011 Advanced Financial Accounting

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Contents
Introduction......................................................................................................................................3
Part 1: Identification and Description of the Accounting Concepts Used by the Selected
Company..........................................................................................................................................3
Part 2: Discussion of Changes that have been incorporated in the new accounting standard for
lease AASB 16 in Relevance to Selected Company........................................................................6
Part 3: Key Disclosures made by Costa Holding Limited on accounting for leases (AASB 16.....8
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
The report has been developed for gaining an understanding of the key financial
accounting concepts. This has been carried out through examining the information published
within the annual report a selected ASX company. The analysis of the annual report is carried for
identifying the accounting concepts used by the company. This is followed by evaluating the
changes that have been introduced within the new accounting standard for lease AASB 16 within
the selected company in context of the relevant examples. Lastly, it summarizes the key
disclosures that the selected company has made in context of the leases accounting and the
impact of transition to AASB 16 from AASB 117. The company selected for the analysis
purpose is Costa Group Holdings Limited, a leading Australian horticulture company involved in
supplying products to the food retailers within the country.
Part 1: Identification and Description of the Accounting Concepts Used by the Selected
Company
The accounting concepts refer to the standardized principles and concepts that are used as
a basis for the development and presentation of annual accounts to the end-users. The accounting
concepts provides a basic framework for financial reporting by providing a set of necessary
assumptions and condition on which accounting of a firm needs to be carried out. As such, they
can also be referred to as postulates, assumptions or conditions that provide a basis for
development and presentation of the financial statements (Cunningham, 2014). The major
accounting concepts that have been used in development of annual report of Costa Holdings
Limited arte described as follows:
Dual Aspect Concept
This accounting concept states the recording of every business transaction in a dual
manner which means that each financial transaction will have two effect that is one on the debit
side while other on the credit side (Unegbu, 2014). The accounting concept is adequately
implemented within Costa Holdings Limited in the development and presentation of its various
financial statements. For example, issuing of an invoice to a customer leads to increase in the

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sales that are reflected within the income statement while accounts receivable is reflected as
assets within the balance sheet.
Money Measurement Concept
The accounting concept has stated that business entities need to record everything in
monetary terms. As per the concept, Costa Holdings Limited has recorded its various financial
transactions presented within the financial statements in the monetary terms as depicted below:
(Source: Costa Holdings Limited Annual Report 2018)
Accrual Concept
As per this accounting concept, revenue and expenses need to be recognized by an entity
at a specific period of time such as within a month or on annual basis. The concept has stated that
a business entity need to record its revenue and expenses within a respective accounting period
irrespective of whether they have been received in cash or not (Kiabel and Nwanyanwu, 2014).
As such, Costa Holdings Limited recognizes revenue when it has been realized while expenses
are recognized on the consumption of an asset. The recording of revenue by the company as per
the concept can be depicted as follows:

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(Source: Costa Holdings Limited Annual Report 2018)
Going Concern Concept
This accounting concept states that financial statements of an entity need to be developed
on the basis of assumption that business will continue to operate in the future context(Unegbu,
2014). As per the concept, Costa Holdings Limited financial statements are developed on the
basis that the entity will continue to operate in the future context. The company has developed its
consolidated statement of income statement which reflects that it has incurred a profit of
$117,778m and there is also a net increase in the cash flows realized from operating activities
from $89.076m to $104,202m over the financial period 2017-2018 (Costa Holdings Limited
Annual Report, 2018). This ensures that the company is expected to continue its operations in the
coming period of time.

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(Source: Costa Holdings Limited Annual Report 2018)
Materiality Concept
The accounting concept requires business entities to disclose all the material information
that can significantly impact the decision-making of end-users. The business entities in
accordance with this accounting concept require incorporating all the materialistic information
that is considered to be significant from the point of view of end-users (Kiabel and Nwanyanwu,
2014). As such, Costa Holdings Limited has disclosed all the materialistic information that might
impact the decisions of the end-users as follows:
(Source: Costa Holdings Limited Annual Report 2018)

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Part 2: Discussion of Changes that have been incorporated in the new accounting standard
for lease AASB 16 in Relevance to Selected Company
The IFRS 16 leases have been adopted by the IASB for replacing the IAS 17 leases that
will become effective after the period of 1st January 2019. The main objective of standard is to
improve the transparency in the disclosures of the leases within the financial statements of a
business entity (IFRS 16 – The new leases standard, 2016). The application of IFRS 16 has
required the business entities to identify all leases and disclose complete information in their
Thus, as per this standard, the business entities are required to recognize all the leases on the
balance sheet. This requires that business entities need to determine the lease term, calculate the
lease liability and recognizing the right of use of an asset (Deloitte, 2016). The accounting of
leases will be similar to the previous accounting standard of IAS 17. However, IFRS 16 has
required that during commencement of a lease contract all leases need to be identified on the
balance sheet by the lessees through recognition of its right of use and the associated lease
liability. The standard specifically intends for removing the differences between operating and
finance leases and recognition of all the leases on the balance sheet. The business entities could
be required to provide information about the costs of using a leased asset and it significant
benefits realized on the balance sheet (Green, 2018).
However, the business entities developing the financial statements as per IFRS standards
are facing increasing issues in adoption of new accounting standard of leases. The new standard
requires disclosure of complete lease information that is largely resource intensive and complex
for businesses. In addition to this, the standard requires large number of estimates to be made and
thus could be very complex for the business entities. It also requires complete reviewing of the
lease contracts to determine the lease term, recognizing the lease liability and right of use of
asset the commencement date of the lease contract. The AASB (Australian Accounting
Standards Board) have also directed all the business entities listed on ASX for complying with
the new standard of leases that is AASB 16 and replacing the previous standard that is AASB
117. As such, Costa Holdings Limited also needs to disclose the information regarding its lease
contract as per the new accounting standard of AASB 16 (Costa Holdings Limited Annual
Report, 2018).

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As analyzed from the annual report of the company, it has adequately segregated the
leases on the basis of operational and financial lease. The recognition and measurement of the
leases of the company is presently done as per the AAS 117 standard for leases. As per the
standard, the company considers the starting if the lease term from the date when the lessee
receives the right for using the leased asset. This is known as recognition process of the leased
asset and its corresponding measurement is done on the basis of decrease in the outstanding
liability and the financial charges (Dhaliwal, Lee and Neamtiu, 2011). The company has declared
within its financial report that it has not yet adopted the new standard of AASB for leases and
will adopt in the future accounting period. In addition to this, it has also disclosed that the
company is yet to assess the complete impact of the new accounting standard on its lease
framework and implementing significant changes in accordance with the new lease standard.
(Source: Costa Holdings Limited Annual Report 2018)
It requires disclosing complete ifnromation about the right of use and the lease liability of
the company at the end of the financial period. As such, the major issue present in this context is
to recognize the right of use of an asset along with its liability because there is large complexity
involved in calculation of operating and finance leases (New leasing standard (AASB 16) brings
significant impacts, 2016). The company is yet to make enhanced disclosures about its lease
contracts for reducing risk exposure of lesser. As per the new standards of AASB 16, the
company is also required to disclose the residual value risk at the end of the financial report. In

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addition to this, the company also needs to integrate the information regarding accounting of
leaseback as per the new accounting standard of AASB 16. Thus, the company has to face larger
issues while complying with the new standard requirements and this can significantly alter the
reporting process of leases of the company. In addition to this, the major issue that the company
is facing to comply effectively with the new accounting standard of AASB 16 is that it would
result in implementing significant changes in the profit of the expenses. It would not adopt the
use of straight line method (Grossman and Grossman, 2010). There is also requirement of
adopting changes in the development and presentation of information regarding the assets
position within the balance sheet. This is because right of use of an asset should be segregated
within the non-current assets whereas lease liability need to be segregated between the current
and non-current liabilities on the balance sheet. Further, it has been stated within the annual
report of the company that it has undertaken a project for ensuring to disclose high quality of
financial information as per the new lease standard of AASB 16(Costa Holdings Limited Annual
Report, 2018). The project involves all the significant members from different departments such
as finance, IT and Chief Financial Officer for developing the accounting policy, assessing the
impact of the new standards and effectively implementing the new standard (Jose and
Constancio, 2018).
Part 3: Key Disclosures made by Costa Holding Limited on accounting for leases (AASB 16
As per the information mentioned in annual report 2018, Costa Holding Limited has
adopted IFRS 16/AASB 16 with effect from 1 January, 2019. Transition effect of
implementation of AASB 16 will be first seen in annual report of year 2019 for the year ending
29 December, 2019. It has been decided to make use of half yearly report to year 2019, to
discuss the key disclosures made by Costa Holding Limited. There has been no information on
transitional provisions and impact of change from AASB 117 to AASB 16 in annual report 2018
and half yearly report 2019 (Annual Report, 2018).
AASB 16 has mandated to reflect all the leases using single on-balance sheet accounting
model by Lessees. To give effect to change in accounting procedure of AASB 16, Costa Holding
Limited as a lessee has recognised lease liabilities in balance sheet. On the other hand, lease
accounting related to lessor remains same as it was in case of AASB 117. Therefore, there was
no change in lease accounting performed on part of lessor. It has been observed from the annual

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report (KPMG, 2018) that Costa Holding Limited has recognised all leases falling in category of
right-of-use assets and lease liabilities in balance sheet. Company has applied AASB 16 through
using retrospective approach that does not provide comparative information to be presented as a
part of recommended procedure. So, Costa Holding Limited has continued to report through
using AASB 117 and interpretation 4 issued by AASB (Annual Report, 2018).
Costa Holding Group make use of Interpretation 4 “Determining whether an arrangement
fall in definition of lease” to identify whether contracts made by company contain lease or not.
But after the application of AASB 16 from the effective date, Costa Holding Limited recognize
contract as lease on the basis of new definition. Under the new definition of lease, any contract
made by entity that identifies the use of an asset for defined period for exchange of consideration
should be recognised as lease by lessee in its balance sheet. It has been observed that company
has applied practical expedient to grandfather approach to give effect on transition of leases on
the basis of AASB 16. It means only those leases have been reassessed that have been previously
shown as leases under AASB 117 and through using interpretation 4. So, leases that have been
not reported previously due to effect of AASB 117 and interpretation have not been reassessed in
current half yearly report, 2019 (Half year financial report, 2019). All contracts that have been
entered on or after January 1, 2019, are being evaluated through using the new definition to
AASB 16. Transition effect to AASB 16, has resulted, Costa Group to allocate the consideration
paid or to be paid in contract for each lease and non lease components on the grounds of defined
relative stand alone prices. But to give transition effect to property leases in which group is
lessee, non lease components have not been separated and they are shown as single lease
component (Half year financial report, 2019).
As a part of lessee, Costa Group leases various assets such as properties, motor vehicle
and equipments. All these lease assets cannot be used as security for loan borrowings, although
there have been no restrictions imposed while lease contracts have been drawn. Leases have been
recognised as right-of-use of asset and their relative lease liability on the date when assets
defined in leases are available for use (KPMG, 2018). The right to use assets has been
depreciated to shorter of useful life of asset or lease term on straight line basis. All the finance
cost has been charged to profit and loss account over the defined lease period in such as way that
constant rate of interest is charged to balancing amount of lease liability. As a lessee, all the lease

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payments are being discounted through using interest rate defined in lease in case such rate is
provided otherwise incremental borrowing rate can be used (Half year financial report, 2019).
Costa Holding Limited measures right-of-use assets on cost basis and it comprises of
following values:
 Lease liability measured initially
 Any lease payment paid before the contract commencement date
 Lease incentives received should be subtracted
 Direct cost paid initially
 All restoration cost provided in lease contract (Half year financial report, 2019)
Following is reconciliation statement providing effect of change from operating lease
commitments to lease liabilities as the part of transition effect of lease liabilities:
(Source: Half year financial report, 2019)
Following information has been disclosed in balance sheet and profit & loss statement to
provide for the new accounting standard AASB 16:

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(Source: Half year financial report, 2019)
(Source: Half year financial report, 2019)
Conclusion
The overall analysis held in the report has inferred that business entities need to adopt the
use of significant accounting concepts provided by the IFRS to develop and present high quality
information within their financial reports. The selected company, that is, Costa Holdings Limited
has adopted the use of all relevant accounting concepts to adequately prepare and disclose the
significant financial information. Also, it has been identified from analyzing the information
provided within the annual report of the selected company that it has not yet adopted the new
accounting standard of leases that is AASB 16. The company is yet to make changes in its
accounting framework as per the standard but the major issues present before the company in