Advanced Financial Accounting Report: RIO Tinto and AASB 16 Analysis

This report provides a detailed analysis of the RIO Tinto Company's annual report, focusing on the application of key accounting concepts and the adoption of the new AASB 16 standard for lease accounting. The report identifies and describes various accounting concepts such as revenue recognition, the economic entity concept, the matching concept, and materiality. It then delves into the specifics of AASB 16, explaining its implications for lease recognition, including the requirement for lessees to recognize assets and liabilities for leases exceeding 12 months. The report further examines the key disclosures made by RIO Tinto regarding its accounting for leases, including the transitional provisions and the financial impact of transitioning from AASB 117 to AASB 16. The analysis includes examples from the company's financial statements and footnotes, illustrating the practical application of these accounting principles and standards. The report also discusses the impact of the transition from AASB 117 to AASB 16 on the Group’s Annual Report where the increase in the lease liabilities that the company is expected to report in the year 2019 will be around US$1.2 Billion, the increase in the right to usage of assets/net investments in the leases will be around US$1.1 Billion. The weighted average incremental borrowing rate that would be applied to the Group’s lease liabilities, which is to be recognized in the balance sheet of the company will be around 4.7%. The company has specifically reported the difference that would be arising in the books of accounts from the lease commitment it actually has and the applicable lease liability will be around $1.3 billion. The report concludes by summarizing the key findings and implications of the analysis.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Accounting Concepts...................................................................................................................2
New Accounting Standard AASB 16..........................................................................................4
Key Disclosures...........................................................................................................................5
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
The company that has been selected for the purpose of analysis is the RIO Tinto
Company that is based in Australia. The Annual Reports presented by the companies is based on
various accounting estimates, standards and assumptions that are made by the company’s
management for the key purpose of classification and recording of various types of items. While
finalizing the presented Annual Report of the company the company has applied various
accounting concepts like fair value estimates, historical value measurement, going concern
approach, principle of materiality, uniformity, objectivity and disclosures of various financial
information were some of the common terms involved in the financial report. The AASB 16
Standard lays out the various courses of actions for the company that introduces a set of single
lessee accounting model and requires recognition of various assets and liabilities for all leases
with a term of more than 12 month of time period by the lessee. The AASB 16 Standard replaced
the AASB 117 Standard “Leases” and the introduction of AASB 16 doe removes and eliminates
the classification of operating and finance lease which the companies used to classify and report
for the leases undertaken (Brumm and Liu 2019). The application of the accounting standard
from the view point of companies in the aspect of AASB 16 and AASB 117 will be well
evaluated for the purpose of analysis and comparison.
Discussion
Accounting Concepts
The Annual Report presented by the company has been well prepared in accordance with
the Australian Accounting Standard Board which well adheres with the International Financial

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Regulatory System. The key accounting concepts that has been used by the company in the
financial report has been in the view and perspective of the revenue recognition, whereby
revenue is recognized when the same is earned by the company. In specific lines as stated in the
financial footnotes “Section 1 of the Financial Footnotes” it is stated that revenue is recognized
by the company on an individual sales when transfer of control takes place between the
customers (ASB, Zone and Network 2018). The key concepts that the company applies for the
purpose of various transactions can be well related with economic entity concept whereby the
transactions of the business are kept and maintained as a separate basis then the owners of the
company.
The application of the economic entity concept business and personal transactions can be
well differentiated. The company has also followed the matching concept principle while
preparing the Annual Report of the company whereby the company has recognized expenses in
relation to the revenue earned by the company in the same period as the revenue is recognized in
the Annual Report (Wouters et al., 2017). On the other hand, the key and important accounting
concept that has been followed by the company for the purpose of preparation of the Annual
Report of the company is the Materiality Concept whereby all the transactions and the associated
disclosures and financial footnotes in comparison to the same has been presented in the Annual
Report of the company. The auditor of the company has further issued an unqualified opinion
about the Annual Report of the company that states that the company has materially disclosed all
the relevant information in accordance with the various assets and transactions that was carried
and reported for the financial year. The Annual Report of the company has been well prepared
with the concept of going concern approach whereby the Annual Report of the company has
been prepared within the concept that the RIO Tinto Group will be well continuing g there

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business operations in the defined period of time. Under the given set of assumptions, it is
important that the revenue and expenses recognition approach followed by the company may be
deferred to a future point of time period, when and where the company carry’s on the operations
of the company. It is accordingly important to note that the expenses recognition has been done
in the same period as and when they are incurred by the company for the various business
operations it has undertaken (Kieso, Weygandt and Warfield 2019).
New Accounting Standard AASB 16
The new accounting standard that has been well applied in the concept for the purpose of
recognizing the leases that company undertakes in the AASB 16 or IFRS 16. The AASB 16
introduces a single lease accounting model whereby the lessee is mandatorily required to
recognize the assets and liabilities for all the lease that is more than a time period of 12 months,
until and unless the time frame and the value of the lease is comparatively of low value (Niescho
2018). The new accounting standard that would be applicable from the year 2019 will be well
adopted by the RIO Tinto Company as stated in the Annual Reports of the company. The lease
liability that would be arising, from the undertaken lease activity will be initially measured at the
present value method whereby the lease payments that would be made by the company in respect
to the asset lease would be discounted using the appropriate discount rate and recognizing the
present value as an liability for the company (Petschler 2018). The new accounting standard that
has been introduced also guides the company in the case of a lease extension option that has been
carried out by the company, it is necessary that the lease payment that would be paid by the
company for the purpose of extending the lease option would be included in the liability side of
the Annual Report presented for the company. The liability that is included or that would be

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included in the books can also be in the form of variable lease payment whereby the lease
payment can also be linked to an index (Joubert, Garvie and Parle 2017).
It is equally important as stated in the AASB 16 that the lessee should recognize the
amount of depreciation for the right of usage of assets and the associated interest on various
types of lease liabilities in the income statement over the lease term period of the company. It is
equally important that an separate or total amount of cash that is paid by the company for the
principal portion are reflected in the financing section of the company, The associated interest
expenses that would be incurred by the company at the same time should be treated as an
operating expenses for the company whereby the same should be classified and recorded in the
operating activity section of the company (Aasb.gov.au 2019).
The new accounting standard AASB 16, has clearly stated that the short-term leases that
are currently for 12 month or lesser period of time would not be reflected in the books of account
(balance sheet) of the company rather than the operating leases expenses for this case will be
treated as an expenses by the company in the income statement of the company (Deloitte
Australia 2019). On the other hand, it is accordingly important to note that all the lease liability
that a company would be having in the books will be revalued on 1st January 2019 whereby the
present value of the leases that would be paid by the company will be discounted using the
appropriate discount rates by the company (Frs.com.au 2019). The carrying value of the lease
will be measured accordingly from the measurement date as if the lease is starting from that date
itself and appropriate adjustment would be done for the purpose of assessing the value of the
lease. At the same time it is equally important that the impairment review must be done by
performed reflecting the right or usage of the asset at the initial application of the standards
(Riotinto.com 2019).

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Key Disclosures
The RIO Tinto as a Group Company will be implementing the standards from 1st January
2019. From the given set of date the company will be applying the lease process as described by
the accounting standard irrespective of the date of lease or date of application of the standard.
For the process of transition of lease reflected in the books of accounts the company will be
applying the modified retrospective approach for existing operating leases that will be well
capitalized under the new standard that will be applied retrospectively with the cumulative effect
approach at the date of initial application as an adjustment to the opening balance of the reflected
retained earnings of the company (Bragg and Bragg 2019). The company has well stated in the
books of account that the existing finance leases will be well according to the carrying amounts
before the transition process and would be represented till the time period of 31st December
2018.
In order to well value the lease liability of the company the company would be revaluing
the lease payment in the form of present value approach on the measurement date, which will be
1st January 2019. The measurement date would be accordingly classifying the lease as an liability
in the books of account of the company whereby it previously used to treat it as operating and
finance lease as an off-balance sheet finance approach under the AASB 117. However, with the
implication of the new accounting standards it becomes important for the company to treat all
leases as finance lease which will be included in the books of account whose values are
considerably greater and which are for a time period greater than one year. However, in specific
to the AASB 16, the standard also says that various other operating leases that the company has
or, which are comparatively of a shorter value and less time period say within twelve month of
time period would be treated as an operating expenses, that is to be recognized in the income

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statement of the company. The new accounting standard that would be applicable from the year
2019 will be well adopted by the RIO Tinto Company as stated in the Annual Reports of the
company. It is accordingly important to note that he lease liability that would be arising, from the
undertaken lease activity will be initially measured at the present value method. The application
for re-measuring the lease payments would be done by the company using the appropriate
discount rate and recognizing the present value as an liability for the company. The RIO Tinto as
a group Company has elected to rely on the various lease payments that it would be making
under the IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, which is well
permitted by the IFRS 16.
The impact of the transition from AASB 117 to AASB 16 on the Group’s Annual Report
where the increase in the lease liabilities that the company is expected to report in the year 2019
will be around US$1.2 Billion, the increase in the right to usage of assets/net investments in the
leases will be around US$1.1 Billion. The weighted average incremental borrowing rate that
would be applied to the Group’s lease liabilities, which is to be recognized in the balance sheet
of the company will be around 4.7%. The company has specifically reported the difference that
would be arising in the books of accounts from the lease commitment it actually has and the
applicable lease liability will be around $1.3 billion as shown below:

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Conclusion
The analysis for the RIO Tinto Group has well stated out the various accounting concepts
that the company has applied for the purpose of classification and recording of the financial
r=transactions it has carried on. In order to prepare the Annual Report of the company there are
various assumptions, judgements and principles that the company need to adhere and the same
has been well discussed and analysed in the above report. The application of new Lease Standard
that is AASB 16 is effective from 1st January 2019 and in order to bring uniformity and better
assessment of the financial position of the company the previous old standard AASB 117 will be
scrapped. The new standard brings a detailed application of the various leases it has in the books
of accounts in terms of classification and reporting of the various leases in the books of account.

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References
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf [Accessed 25 Sep.
2019].
ASB, A.A.S.B., Zone, A.S.E. and Network, B.G.B., 2018. Redefining Corporate Social
Responsibility. Agenda, 52, p.54.
Bragg, S. and Bragg, S. 2019. Basic accounting concepts — AccountingTools. [online]
AccountingTools. Available at: https://www.accountingtools.com/articles/basic-accounting-
concepts.html [Accessed 25 Sep. 2019].
Brumm, L. and Liu, J., 2019. New leasing accounting standard. Taxation in Australia, 53(8),
p.449.
Deloitte Australia. 2019. Australian Accounting Standard 16, Leases: effective 1 January 2019 |
Deloitte Australia | Technology, Media and Telecommunications. [online] Available at:
https://www2.deloitte.com/au/en/pages/technology-media-and-telecommunications/articles/
australian-accounting-standards-16.html [Accessed 25 Sep. 2019].
Frs.com.au. 2019. AASB 16 LEASES – FRS. [online] Available at: https://www.frs.com.au/aasb-
9-financial-instruments-december-2014-5/ [Accessed 25 Sep. 2019].
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.

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Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2019. Intermediate accounting. John Wiley &
Sons.
Niescho, C., 2018. Triple whammy. Company Director, 34(5), p.62.
Petschler, L., 2018. Advocacy: New regulators at the reins. Company Director, 34(1), p.16.
Riotinto.com. 2019. [online] Available at:
http://www.riotinto.com/documents/RT_2018_annual_report.pdf [Accessed 25 Sep. 2019].
Wouters, M., Selto, F.H., Hilton, R.W. and Maher, M.W., 2017. T Course: Management
Accounting 1 [T-WIWI-102800]. Module Handbook Industrial Engineering and Management
(B. Sc.).