Advanced Financial Accounting: Impact of New Lease Standard AASB 16

This report critically evaluates the introduction of the new lease standard, AASB 16, replacing AASB 117, and its implications for financial reporting. The analysis focuses on Beam Telecommunications Limited, examining the changes in lease accounting and the transition from the old to the new standard. The report identifies the accounting concepts used by the company and outlines the key disclosures made regarding lease accounting. It details the impact of the new standard on financial statements, including the recognition of lease assets and liabilities, changes in expense recognition, and the separation of cash flows. The report also highlights the expected changes in key financial metrics and the need for companies to communicate these changes to stakeholders. Furthermore, it addresses the challenges faced by companies in the telecommunication sector, such as separating lease and non-lease elements and determining control over assets. The analysis concludes with an overview of the impact of the new standard on the company's financial position, including the increase in long-term financial liabilities and the potential impact on EBITDA.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
Name of the Student
Name of the University
Author Note

ADVANCED FINANCIAL ACCOUNTING
Executive summary:
The report is prepared to critically evaluate the introduction of new lease standard and the
prerequisites taken by the reporting entity prior to the implementation. The new lease
standard 16 would come into effect and this would replace the existing lease standard that is
AASB 117. Changes brought due to the introduction of new lease standard has been
accounted by referring to the annual report of the company Beam Telecommunications
limited. The effect of the transition from old to new lease standard has been evaluated by
summarizing the key disclosures made by the company on its lese accounting. In addition to
this, report also outlines the changes that will come into effect after the implementation of the
new lease standard and how such changes would impact the performance of organization.

ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Introduction:...............................................................................................................................3
Discussion:.................................................................................................................................3
Identification and description of the concept of accounting used by Beam Communications
Holding:......................................................................................................................................3
Identifying the changes incorporated in the new lease standard AASB 16:..............................3
Identifying the key disclosures made by the company on the lease accounting and the effect
of transition from AASB 117 to AASB 16:...............................................................................3
Conclusion:................................................................................................................................3
Reference list:.............................................................................................................................4

ADVANCED FINANCIAL ACCOUNTING
Introduction:
The paper is prepared to evaluate the introduction of new accounting standard for
lease and the impact of the transition of the lease standard on the reporting entity. All the
changes that have been incorporated in the new accounting standard for lease has also been
outlined in the report. For the analysis of the introduction of new leased standard and the
impact and accounting treatment changes on the organization has been done by taking the
examples from one of the companies listed on the Australian stock exchange. The chosen
company for identifying the change in the accounting treatment of lease after the introduction
of new lease standard is Beam Communication Holding. Beam communication holding is the
leading company operating in the telecommunication industry and specializes in the
development, design, distribution and manufacture of wide range of cellular and satellite
terminals and accessories (beamcommunications.com 2019). The impact created by
transformation of the accounting lease standard has been explained by referring examples
from the company. In addition to this, the accounting concepts used by the company has been
also illustrated in the report.
Discussion:
Identification and description of the concept of accounting used by Beam
Communications Holding:
All the amended and the new accounting standards and its interpretation that are
issued by AASB and are mandatory for the current accounting period has been adopted by
the consolidated entity. There has been a consistent application of all the relevant accounting
polices while preparing the financial report. The general purpose financial statements of the
company is prepared by adhering to the interpretations and Australian accounting standards

ADVANCED FINANCIAL ACCOUNTING
issued by the Corporation Act 2001 and AASB (Australian accounting standard board). The
preparation of the financial report incorporates the consistent application of material
accounting policies. The financial statements except for the cash flow statements that is
statement of financial position, statement of changes in equity and statement of
comprehensive income has been prepared on an accrual basis and are based on the historical
cost and wherever application, modifications have been done. The financial liabilities,
financial assets and some selected non-current assets are measured at fair value. In addition to
this, the principles of consolidation in the preparation of the consolidated financial statement
is that it incorporates all the liabilities, assets and results of all the subsidiaries which are the
entities in the control of parent. All the comparative figures are adjusted as and when required
by the accounting standards so that it conform to the changes in the presentation in the
present financial year (Wu et al. 2017).
The accounting policy for measuring inventory is that they are measured at lower of
net realizable value and cost. Plant and equipment on other hand are carried at cost by
deducting the accumulated losses and depreciation and the amount is reviewed at each
reporting date for ensuring that the carrying value do not exceeds the recoverable amount.
Intangible assets such as development cost are amortized on systematic basis for matching
the future production. In addition to this, measurement of the financial instruments are done
on the trade date at transaction cost. The statement of profit and loss accounts for realizing
gain and loss due to any changes in the value of liabilities and assets. Recognition of revenue
from the sales of goods are done at the fair value and recognition of rental income and
interest revenue is done when they become receivable (Ifrs.org 2019).

ADVANCED FINANCIAL ACCOUNTING
Identifying the changes incorporated in the new lease standard AASB 16:
The introduction of new lease standard AASB 16 has impacted the accounting of the
operating leases and this is likely to create a significant impact on the business financial
statements. Substantial changes have brought to lease accounting by removing the distinction
between operating and financing lease and both of them being accounted on the balance sheet
of the organization. With the new lease standard, the financial position of the business would
be more accurately represented as the total amount of liabilities are accounted for and
providing the users with more transparent and reliable information (aasb.gov.au 2019).
Under the new standard that is AASB 16, the classification of lease as operating and
financial lease is completely eliminated. There will be increased financial liabilities and
leased assets according to the new requirement and thereby bringing about a change in the
key financial metrics. The nature of expenses related to lease would be changed for the
companies with material off balance sheet leases. In addition to this, the straight line
operating lease expense for the leases applying the charge for depreciation is also replaced
(Magli et al. 2018). However, the commitment of the company toward cash payment or its
economic position is not affected by the new lease accounting standard. A company under
new standard is required to recognize the lease assets and liabilities that are measured at the
present value of future lease payment that cannot be avoided. Over the lease term,
recognition of interest on lease liabilities and depreciation on lease assets are done in the
income statement. In addition to this, the total amount of cash paid as the interest (presented
within either operating or financing activities) and principal portion (within the financing
activities) in the cash flow statement is separated. Furthermore, the new standard requires the
company to recognize the amount that is expected to be paid under the guarantee of residual
value instead of the maximum amount that has been guaranteed. For the lessor, it is required

ADVANCED FINANCIAL ACCOUNTING
to make a disclosure about additional information about the risk management related to
residual interest (Modugno and Di Carlo 2019).
Identifying the key disclosures made by the company on the lease accounting and the
effect of transition from AASB 117 to AASB 16:
Beam Telecommunication Holding has accounting policies for the treatment of lease.
The lease payment for the operating lease are charged as expenses and the treatment is done
in the period in which such expenses have been incurred and substantially all the benefits and
risks remain with the lessor. All the accounting requirements which is applicable to lease is
done in accordance with the existing lease standard that is AASB 117 and after the new
standard that is AASB 16 is effective, this will replace the existing standard for lease
followed by the company (Christensen et al. 2016). With the adoption of the new lease
standard, the requirement for lease to be classified as operating and financing lease is
eliminated due to introduction of single lease accounting model. There would be additional
disclosure requirements made by Beam telecommunications when recognizing depreciation,
right to use assets and liability for all leases. However, such lease would exclude leases
relating to low value assets and leases having tenurity of less than twelve months. In addition
to this, a lessee under the transitional provision of AASB 16 is allowed to apply the standard
retrospectively by aligning with the requirement of AASB 108 and making adjustment to
opening equity by recognizing the retrospective application with cumulative effect on the
date of initial application. Furthermore, it is reviewed by the directors of the entity that the
adoption of the new lease standard will have an impact on the financial statements of the
group. This is so because any lease which is greater than twelve months should be recognized
as a related right to use asset and as a lease liability on the balance sheet. In addition to this,
it is also anticipated that from the financial year 2020, the net present value of the lease

ADVANCED FINANCIAL ACCOUNTING
commitment of the group which is more than twelve months will be accounted on the balance
sheet as current and non-current liability and asset. In the current financial year 2018-2019,
the net present value of the commitment of operating lease stood at $ 720000
(beamcommunications.com 2019)..
The commitment concerning operating lease of the parent entity is same as the
commitment of the consolidated entity as mentioned in the notes to the financial statement. In
addition to this, there is no commitment on the capital expenditure by parent entity.
The new lease standard AASB 16 is expected to impact the companies operating in
the telecommunication sector in terms of separation of elements of lease and non-lease and in
terms of identification of lease. Some of the entities operating in telecommunication industry
leases a vast number of big ticket items such as cell towers, network equipment, fiber optic
cables and satellite transponders (Sacarin 2017). Telecom entities such as Beam
telecommunication holding under the requirement of new lease standard should determine
whether control over a provided capacity or over a physically distinctive portion of assets is
provided by lease. They should determine whether the lease is judgmental and complex for
the entity. Moreover, for separating the elements of lease and non-lease, multiple elements
arrangements which the customers provide should be unbundled by the entities.
Consequently, such entity might be willing to combine the new revenue recognition standard
with the new lease standard by accounting for the interdependencies between these two
standards (Joubert et al. 2017).
With all the leases being accounted on the balance sheet, new lease standard is
expected to increase the total value of long term financial liabilities. The key accounting
metrics of the company would be impacted by such standard and it is required on the part of
organization to communicate clearly the impact of changes to the stakeholders. Assets in the

ADVANCED FINANCIAL ACCOUNTING
joint agreements should be evaluated for identifying the customers and the impact of the
standard on reporting should be accounted for (Dunbar and Laing 2017).
The introduction of AASB 16 also highlights some of the issues for the companies
such as Beam telecommunication holding. For the company, leases with the low value assets
and leases not containing the purchase option and with a term of twelve months or less might
be accounted for as a service. Entity should apply a considerable level of judgment when
determining whether a contract provides with specific control over the asset. In addition to
this, an average increase in the margin of EBITDA of 2,5 percentage points is indicated by
the high level analysis of current disclosures. It is suggested by the previous research work on
the largest telecom operator of the world that a level of gross debt would increase between
15% to 20% and balance sheet will have additional $ 125 billion right of use assets
(assets.kpmg 2019). The good proxy for the cash flow is EBITDA less capital expenditure
and are used as the basis of valuation. For defining the capital expenditure, the consideration
of capitalizing the right of use assets as required by the lease standard AASB 16. For
instance, it will be investing in the cash flow in PPE and addition to carrying amount of PPE.
Beam telecommunication will be required to take into account the addition of lease liabilities
when computing the debt obligation level (Schroeder et al. 2019). This is so because debt
covenants and leverage ratios is negatively impacted by bringing the liabilities onto the
balance sheet. Now, considering the telecom equipment such as installation of IT equipment,
satellite dishes and set top boxes needs to be specified implicitly. For delivering the same
service, such assets can be substituted easily. In such situation, when entering into contract,
for ascertaining whether the contract can be regarded as lease, it would be determine whether
such substitution would be economically beneficial to the suppliers or not (Brumm and Liu
2019).

ADVANCED FINANCIAL ACCOUNTING
Some of the intangibles relevant to the company is specifically excluded by the scope
of the standard mainly in terms of licensing arrangements. Lessees are permitted with the two
exemptions from the requirements of recognition. These include leases having a low value of
underlying assets and leases containing no options to purchase and of lease term of twelve
months or less. Assets of the company that would be considered as of the low value is
generally the set top boxes and mobile phones. One of the areas of judgment for the company
is to determine whether the contract is in scope. Entity on the adoption of standard is not
required to reassess the contracts for lease. However, the existing assessment under the
interpretation 4 of AASB can be carried forward. This has the implication that the existing
contract will be applied under the standard that has been previously identified and after the
adoption of the standard, the organization has entered into new contract (Dakis 2016).
During the phase of transition, Beam Telecommunication will have the option to
retrospectively apply the standard but with the condition that AASB 15 has already been
implemented. The previous figures can be restated and measurement of assets and liabilities
can be done at the incremental borrowing rate and the cumulative adjustment of the retained
earnings opening balance has been done initially. Since the disclosure of operating lease on
the balance sheet would track lease data more closely, the control and system of lessees
would be significantly impacted. Telecom operator such as Beam telecommunication enters
into significant number of operating lease arrangements, it is required on their part to conduct
an in depth analysis of the requirements in the intervening period. They should be able to
make required changes to their system, processes and control after considering any wider
implications of AASB 16. In order to ensure that the requirement of the new standard is met
in a cost effective and timely manner, implementation plans should be established and early
planning should be done. For the organizations to seek some relief upon the implementation
of the standard, some practical expedients and options are available when applying the

ADVANCED FINANCIAL ACCOUNTING
retrospective modified approach. It is expected that post the transition years, the profit and
loss trend and the carrying amount of net assets would be considerably impacted using the
selected transition approach (Schroeder et al. 2019).
Conclusion:
The report has analyzed the impact of the implementation of the new lease standard
and the changes brought in the accounting treatment of the reporting entity. Introduction of
new lease standard AASB 16 has replaced the previous standard that is AASB 117 which
failed to provide detailed disclosure of the leases items and might mislead the users in terms
of the financial position of the company. It has been ascertained that there would be
considerable amount of change in the accounting treatment and various accounting metrics
post the implementation of AASB 16. Beam Telecommunication Holding in the current
financial year has not implemented this standard but have accounted for the expected changes
when the standard will be applied in year 2020. The effect of transition can be observed in
terms of difference in the accounting treatment and the accounting concepts used for lease.
However, organization should be well prepared by establishing and planning so that the
requirements of new lease standard are met in a cost effective and timely manner.

ADVANCED FINANCIAL ACCOUNTING
Reference list:
Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf [Accessed 13 Sep.
2019].
Assets.kpmg. (2019). [online] Available at:
https://assets.kpmg/content/dam/kpmg/xx/pdf/2017/11/leases-telecom-global.pdf [Accessed
13 Sep. 2019].
Brumm, L. and Liu, J., 2019. New leasing accounting standard. Taxation in Australia, 53(8),
p.449.
Christensen, H.B., Nikolaev, V.V. and Wittenberg‐Moerman, R., 2016. Accounting
information in financial contracting: The incomplete contract theory perspective. Journal of
Accounting Research, 54(2), pp.397-435.
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
Dunbar, K. and Laing, G.K., 2017. Deconstructing the Accounting Standard AASB 13 Fair
Value: Exit vs Entry Price for Assets. Journal of New Business Ideas & Trends, 15(2).
Ifrs.org. (2019). [online] Available at:
https://www.ifrs.org/-/media/project/leases/ifrs/published-documents/ifrs16-effects-
analysis.pdf [Accessed 13 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.