HA3011: Advanced Financial Accounting - Lease Standard Analysis Report

This report provides an in-depth analysis of the AASB 16 lease accounting standard, focusing on its impact on financial reporting for companies listed on the Australian Securities Exchange (ASX). The report analyzes the annual reports of two major mining companies, Rio Tinto and BHP Billiton, to illustrate the changes introduced by AASB 16. It identifies and describes the accounting concepts used by these companies, details the changes incorporated by the new standard, and summarizes the key disclosures made regarding their accounting for leases, including the transitional provisions and the effects of the transition from AASB 117. The report examines how the new standard impacts financial statements, particularly concerning the recognition of assets and liabilities, the treatment of operating leases, and the presentation of expenses. It also highlights the complexities and reporting burdens associated with the implementation of AASB 16 and its effects on key financial ratios. The analysis includes examples from the selected companies' financial statements to illustrate the practical implications of the standard, offering valuable insights into its effects on financial reporting practices.

HA3011 Advanced Financial Accounting
Assignment T2 2019

AASB 16
Executive Summary
The changes and the enhanced framework introduced by AASB will help the companies to
attain a better position by reflecting the desired information. In this report, the report deals
with AASB 16 that influence all the organizations. The new standard will have a major
influence on companies that are connected lessees of assets and compliance is made
necessary for the ones who are preparing GPFR. In this report, two major mining giants listed
on the ASX is selected that is Rio Tinto and BHP Billiton.
The report introduced with the two selected companies that is BHP and Rio followed by the
changes that have been introduced by AASB 16. Further, a summary is present of the
disclosures made by the company.

AASB 16
Contents
Introduction...........................................................................................................................................4
1. BHP LTD.........................................................................................................................................4
 Identify and describe the accounting concepts used.....................................................................4
 Changes have been incorporated in the new accounting standard for lease AASB 16..................5
 Key disclosures the company has made on its accounting for leases............................................6
2. RIO TINTO......................................................................................................................................7
 Identify and describe the accounting concepts used.....................................................................7
 Changes have been incorporated in the new accounting standard for lease AASB 16..................7
 Key disclosures the company has made on its accounting for leases............................................8
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11

AASB 16
Introduction
The new standard of accounting will assume a place of special importance in making
different changes in the financials of the company. The implementation of the new standard
will influence the industry as a whole because it will bring various changes such as the
provision of beneficial details to the shareholders in terms of decision-making. The new
standard is likely to make a change in the expenses part that forms a part of the financials
(Laux, 2014). Such expenses are difficult to be ascertained with the help of straight-line
rental base and thereby computed based on the profit that is estimated and leads to an
exaggeration of the net profit (Bodie, Kane & Marcus, 2014). Moreover, the difference of
financial reporting can help in incorporating the ROU assets that projects non-current value
but the lease liabilities will have two major choices that the company needs to ensure. The
new standard will provide a better projection of the financial position of the business thereby
projecting the liabilities and providing meaningful insight into the financial reporting process.
The new standard brought change in the profile of the expense and this will be studied
through the study of Rio Tinto and BHP Billiton. Instead of a straight line expense, there will
be more expenses at the beginning and less during the further years thereby influencing the
earning profiles.
1. BHP LTD
 Identify and describe the accounting concepts used.
The accounts have been prepared as per the Australian Corporation Act, 2001 and UK
Companies Act, 2006. The preparation of the accounting has been done considering the
accounting standards and interpretations as per IFRS that is issued by the IASB. As per the
Australian Accounting Standard issued by the AASB is in line with IFRS and as per
interpretations provided by the EU (BHP Billiton, 2018).
The books are maintained as per going concern basis that is it is expected to continue for
perpetual life that it will not shut down or liquidate shortly.

AASB 16
The items are recorded as per historical cost concept and principles remaining the other assets
that are carried at FV like financial assets like derivative financial instruments. The assets
which are held for sale or distribution being non-current assets or disposal groups are valued
at lower of amount that is carrying and FV less cost required in the disposal of assets.
 Changes have been incorporated in the new
accounting standard for lease AASB 16
In the notes to financial statements, the company has disclosed the significant accounting
policy regarding the recognition basis of various income and expenses as well as assets and
liabilities. The measurement policies of valuation of all the items in the financial statements
are also disclosed (BHP Billiton, 2018). All the items are recognized as per generally
accepted accounting policy otherwise proper disclosure is given.
The presentation currency of the company is US dollars that are the strongest currency in the
world. The figures are shown in million dollar and rounded off unless stated by the ASIC.
The accounting policy is followed consistently year after year applied by all entities and are
consisted of those applied in all prior year presented.
As per AASB 16 on leases earlier there was a distinction between operating and financial
lease. The Balance Sheet includes only financial assets and operational lease assets were not
included in the financial statements. As per the new change in the standard, the difference
between operating and financial leases will be removed and the company will have to show
all assets and liability in the balance sheet (BHP Billiton, 2018). Thus even operational lease
assets and liabilities will be included in the balance sheet of the company giving it the more
accurate and relevant presentation of the balance sheet. This process has some complexities
and issues which need to be resolved in the new standard.
Thus earlier the expense was booked on a straight line in being the lease rental for the period
of the operating asset. The lease assets irrespective of it being operational or financial will be
treated at par. Thus even on operational assets, the proper recording will be done and profit
will be charged with higher amounts in the earlier years than in the future years as it is done
for all other assets including financially lease assets (Lister, 2018).

AASB 16
This will impact many keys and important ratios of the company. Thus in representing and
comparing the current data with the previous year will require a lot of calculation. This will
increase the reporting burden of the companies. If proper calculation is not done for the
current year as well as the past year than the data of the current year will not be comparable
with past years. These changes will impact the Earning before interest, tax, and depreciation,
which are used by many stakeholders for various evaluations about the company. Now the
lease rentals will also be divided between current and non-current liabilities and on the other
hand, the leased asset will come under non-current assets as Fixed Asset (BHP Billiton,
2018). The above procedure would increase the long term assets but the correspondingly
same amount of non-current liability will not be increased in liability side but in the liability
side some part will be current and other will be non-current. This will have an impact on the
current ratio and the working capital ratio of the company.
 Key disclosures the company has made on its
accounting for leases
As per the new standard exemption is given to short term and low-value lease assets. The
group has been progressing its implementation of new standards; it is focusing on new
contracts and reviewing existing ones. It is aggregating its data to support and process the
implementation of the new standard. The alterations will influence the recognition of its
assets and liabilities. This will impact the classification recognition timing of the expenses
thus the cash flow generation from operating and financial activities will even undergo a
change (Peirson et.al, 2015). The group is considering between two options of either having
retrospective impact with a restatement of comparatives of the last year and between the
altered approaches with the overall influence of application as at 1st July 2019.
The remaining operating leases that exists will undergo alterations as per the new regulations.
The lease population will impact the transition period and its impact. The total commitment
of the company in respect of operating lease witnessed an increment from $1752 million in
2017 to $2012 million. Thus a huge amount is involved and major changes will happen due
to such implementation of a new standard (BHP Billiton, 2018). The group financial lease
involved power generation lease and assets transmission. There are some lease payments that
are exposed to clauses of inflation and on the same contingent rents are ascertained. The
operating leases comprise leases of PPE. In this type of arrangements rentals from lease are
generally fixed but with inflation escalation clauses on which contingent rentals are

AASB 16
determined. Thus this new implementation will impact the plant, property, and equipment
valued in the financial statements will change (Petersen & Plenborg, 2012). Thus the major
part of the balance sheet which will get impacted by such new changes in the treatment of
operating leases.
2. RIO TINTO
 Identify and describe the accounting concepts
used.
Rio Tinto is a dual-listed company so all the companies are treated as a single economic
entity to implementation of the IFR. The interests of all the shareholders are shown under
equity interest in the group. The financial statements are represented in US Dollars as it is
more reliable in representing the company’s global business performances (Rio, 2018).
As per Companies Act, 2006 the accounting statements are prepared as per going concern
concept as per all laws and regulation applicable on the company and as and when amended,
all this are collectively known as IFRS. Any amendments, alterations or standards are not
adopted which are not mandatory but issued. All the policy of the group was the same as of
the last years except the mandatory changes as required by the new standard on lease. The
group has adopted IFRS 9: Financial Instruments, IFRS 15: Revenue from contracts with
customers and IFRIC 22: Foreign Currency Transaction and Advance Consideration. The
impacts of the transition of other enactments are not so material except IFRS 16: Leases
which has been endorsed by European Union also (Rio, 2018).
 Changes have been incorporated in the new
accounting standard for lease AASB 16
As per new standard all right in an asset and lease liabilities is needed to be ascertained in
the balance sheet. The measurement of initial lease liability is done depending on the PV of
future lease payments. The initial recognition includes various calculations including the
dismantling and restoration cost. But as per new presentation the depreciation and interest on
lease payments over the lease terms into the income statement (Vengadasalam , 2018).

AASB 16
The standard needs to be implemented by the group from 01st January 2019. The company
does not want to change the existing contracts on the given date and continue representing the
same in the earlier manner, known as “grandfathering” concept. By this process, the company
will be in a position to know whether the contracts that are existing contains a lease at the
time of application
As per IFRS, the application of the modified retrospective approach to operating leases that
exist that will be capitalized as per new standard. Thus the balance will be adjusted with the
retained earnings
The group will bring low-value leases and short term leases that are less than 12 months on
run as on 1st January 2019. Such costs will be expensed directly to the income statement. The
group will also exclude any initial direct cost from the measurement of use asset at
transition. The review of impairment will be done on initial recognition of the asset (KMPG,
2019).
The group contains no individual non-lease elements with lease components for vessels and
properties for transitional adjustment for the initial time. The company will continue of non
applicability of lease on intangible assets (Vengadasalam , 2018). The implementation of the
new standard will lead to an increase in lease liability by $1.2 billion and an increase in right
of use asset or net lease asset by $1.1 billion. This will also lead to a charge of around $0.1
billion in retained earnings (Rio, 2018).
The group as a lessor is not much material and that will not impact the financial statements.
Thus the influence of the new standard as a lessor is much as transactions being a lessor is
insignificant when the group as a whole is concerned (KMPG, 2019).
 Key disclosures the company has made on its
accounting for leases
The company has made a detailed disclosure in its financial statement regarding the impact
and expected changes in the standard will influence the financial statements. This is such
major change that it will impact all the parts of the financial statements like income
statement, balance sheet as well as cash flow statements.

AASB 16
All the stakeholders including banks and other financial institutions should change its
perspective as after its implementation all the figures will change and benchmarks of key
ratios should be renewed with new and updated marks for proper evaluation of the companies
and their financial statements. Thus the basis of deciding the working of the company should
be changed (CPA, 2019). The shareholders also refer to various ratios in the stock market to
decide their investment decision thus they should also be provided with detailed information
so that they do not take any decision based on old and outdated information. The main
advantage of these new standards that it will impact most of the company and thus the overall
market is ready for such changes.
The companies should also be very careful in implementing this as it involves many areas
and expert knowledge is required to properly show every item. It seems to create an extra
burden on the company in the initial stage but will be very beneficial in the long run. It will
reduce the option as well as confusion as to which agreement to be considered as financial
and which to be treated as operational lease assets (CPA, 2019). This will also reduced the
chances of manipulation by the company to show the asset as per its choice, as in current
scenario many companies treat or make an agreement of lease as it wants it to represents it in
the books, as the bifurcation involves some amount of estimation which cannot be ensured
with 100% accuracy. Thus this new standard will give a presentation of the financial
statements and all the actual assets and liability of the company which is either owned or has
only right to use it. The assets which are used by the company is also shown in the balance
sheet. Thus from a new financial statement will show all the assets of the company.

AASB 16
Conclusion
The above discussion and analysis give meaningful insight into the functioning of Rio and
BHP Billiton. It projects that the leasing function is vital in managing the financial affairs of
the company. When it comes to the implementation of the new lease standard, it can be
commented that there will be significant changes in the balance sheet of both the companies.
The application of new standards will ensure that the company’s liability is reflected properly
and that the transparency of leasing activities is maintained. Further, it helps in projecting the
lessee financial leverage and the capital that is employed. The new standard can be more
precise and will help in understanding the entire matter. This will provide a better scope of
comparison and will help the investor, as well as shareholders to compare the financial status
of companies. Further, the changes will have an increment in the complexity level and will
lead to risk in reporting. When it comes to the new year of implementation, companies will
have a huge balance sheet that will be needed to be explained to the interested parties. The
disclosure level will be high for both the companies that are BHP and Rio and will thereby
help all the related parties in getting the desired information.

AASB 16
References
BHP Billiton 2018, BHP Billiton 2018 annual report & accounts, viewed 26 September
2019, https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf
Bodie, Z., Kane, A. and Marcus, A. J 2014, Investments, McGraw Hill
CPA 2019, IFRS 16 Leases, viewed 26 September 2019,
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/reporting/factsheet-ifrs16-leases?Division=Victoria&Segment=The+Rest
KMPG 2019, AASB 16: Leases, viewed 26 September 2019,
https://home.kpmg/au/en/home/insights/2017/04/aasb-16-leases-standard.html
Laux, B 2014, Discussion of The role of revenue recognition in performance reporting.
Accounting and Business Research. 44(4), 380-382 viewed on 19 September 2019
<https://doi.org/10.1080/00014788.2014.897867>
Lister, J 2018, Advantages and Disadvantages of Financial Risks Within Companies, viewed
on 19 September 2019 <https://smallbusiness.chron.com/advantages-disadvantages-financial-
risks-within-companies-16048.html
Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S 2015, Business Finance, 12th
ed. North Ryde: McGraw-Hill Australia.
Petersen, C. and Plenborg, T 2012, Financial statement analysis, Harlow, England: Financial
Times/Prentice Hall.
Rio Tinto 2018, Rio Tinto 2018 annual report & accounts, viewed 26 September 2019,
http://www.riotinto.com/documents/RT_2018_annual_report.pdf
Vengadasalam , V 2018, AASB 16 New Lease Standard: 1st January 2019, viewed 26
September 2019, https://www.accru.com/2018/10/aasb-16-new-lease-standard/