Finance Lease Disclosures: Impact of AASB Standards in Australia

This report provides a comprehensive overview of finance lease disclosures in accounting, with a specific focus on the Australian context and the impact of the Australian Accounting Standards Board (AASB) standards, particularly AASB 16. The paper begins by defining finance leases and their importance in corporate financing, contrasting them with operating leases. It then delves into the historical changes in lease disclosure practices and the rationale behind these changes, emphasizing the shift towards improved transparency and comparability. The core of the report examines the new AASB 16 standards, highlighting their implications for financial statements, including the treatment of leases as assets and liabilities on the balance sheet. The disclosure requirements of finance leases are detailed, covering the separation of lease liabilities, contingent rent payments, and other relevant details. The report also explores the benefits of finance leases for lessees. The paper concludes by emphasizing the importance of understanding and complying with the new guidelines for effective financial reporting.

DISCLOSURES FOR FINANCE LEASE
Course
Name Course
Date

Introduction
There has been an increasing need for big corporations to improve their modes of
disclosure and reporting of lease transactions in the recent past. This has been necessitated by the
fact that leasing is becoming an important solution of financing for many multinational
companies a situation which has seen its wide use. Leasing usually enables a company to make
use of the property and equipment being leased without having to incur substantially large cash
outflows to access them. The flexibility and the benefits of a lease in terms of providing a cover
for obsolesce give the lessee the chance of evading residual value risks that are associated with
buying of properties that require a huge cash outflow to acquire. Since leasing is the only way of
obtaining the physical use of an asset without having to purchase it, it has become the widely
preferred mode of financing among big corporations in Australia. This paper seeks to explain
disclosure issues of finance lease in accounting, investigate why leasing disclosure has been
changed in Australia and identify the effects of the new AASB standards on an Australian
company's financial statements while identifying the importance and implications brought about
by the new guidelines on disclosure of finance leases.
From a contemporary definition, a lease is a contract where one party who is the leaser,
conveys his or her own property in form of either land, machine or equipment and other services
to another party called the leaser, for use for a certain time frame usually specified in the lease
covenant and in return payment of a specified amount1. There are basically two types of leases in
accounting, an operating lease and a finance lease. A finance lease is a leasing contract where the
lessor avails the leased property to the lessee who is required to pay rent for an agreed period of
time while carrying all the risks attached to the ownership of the asset. Ideally, a finance lease
1 "Accounting For Leases: Presentation And Disclosures | Insights". 2018. Bakertilly.Com.
http://www.bakertilly.com/insights/accounting-for-leases-presentation-and-disclosures

usually allows the owner of the property(leaser) to transfer substantially all the risks attached to
the property to the lessee. However, the definition of a finance lease and operating leases have
been countered recently by the news standards set by AASB in February 20162. According to the
Australian Accounting Standards Board(AASB), the new definition of a lease is any leasing
contract that enables the lessee to have absolute control of the property under lease for a certain
specific period of time and also having the opportunity to obtain substantial economic benefits
from the use of the same property3. The new AASB 16 standards formulated in 2016 aims at
bringing an overall when it comes to the disclosure of lease transactions among companies in
Australia.
Beginning the financial period 1st January 2019, many Australian entities will have to
abide as per the new regulations outlined by the Australian Accounting Standards Board4. A
close look at the regulations set by AASB 16 shows that the classification of the operating and
finance lease is likely to be scrapped so that all leases are going to be accounted for together in
the statement of financial position (balance sheet) as assets and liabilities5. In my view, I believe
this initiative is going to reduce the confusion that has always been there regarding the
classification, disclosure and reporting of finance and operating leases in the financial
statements. The implications for the new standards is that companies will no longer have to
classify leases as finance or operating leases but will have to classify all the leases including its
2 "Australian Accounting Standard AASB 16 Leases | Regulation Impact Statement Updates".
2018. Ris.Pmc.Gov.Au. https://ris.pmc.gov.au/2016/04/19/australian-accounting-standard-aasb-16-leases.
3 "Accounting Standards". 2018. Aasb.Gov.Au. http://www.aasb.gov.au/Pronouncements/Current-standards.aspx.
4 Knubley, Rachel. 2010. "Proposed Changes To Lease Accounting". Journal Of Property Investment & Finance 28
(5): 322-327. doi:10.1108/14635781011069936.
5 Mills, Jones. 2017. "Thoughts On The Impact Of Changes To AASB 16?". Intelligent Investor.
https://www.intelligentinvestor.com.au/thoughts-on-the-impact-of-changes-to-aasb-16-1878181.

liabilities as one thing in the balance sheet, where the leased property will be treated as a fixed
asset while the rental payments will be classified as liabilities.
The disclosure of a finance lease usually requires the lessee to separate the lease liabilities as
either current or non-current liability. The current liability, in this case, is the amount of principal
that should be paid within the period of one year while the non-current liability is the amount of
the principal that is payable within a period that is greater than one year. Under the current
requirement of IAS 16 – Property, Plant and Equipment Disclosure, leased assets are required to
be treated as tangible non-current assets in the books of the lessee6. IAS 17 further sheds more
light when it comes to the disclosure of a finance lease in the books of a lessee. The standard
requires that for any class of a leased asset, the net carrying amount of the property that is being
held under a finance lease at the end of a company’s financial period should be reconciled with
all the future lease payments that requires to be paid together with the present value of all the
future minimum leases payments are computed7. The process is called discounting. The results of
such a reconciliation should result to lease payments that are due within one year and others
which are due after one year but not later than 5 years and others after 5 years.
A finance lease disclosure also requires the revelation of material details involving the
arrangements of contingents rent payables or renewal payments, lease restrictions on the asset
(for example but not limited to using the asset as security for a debt, re-leasing, use as payment
of dividends etc.)8. Moreover, finance lease disclosure should specify if the contingent rents are
categorized as expenses or a liability during the period. Contingent payments are dependent on
6 Knubley, Rachel. 2010. "Proposed Changes To Lease Accounting". Journal Of Property Investment & Finance 28
(5): 322-327. doi:10.1108/14635781011069936.
7 "IAS 17 — Leases". 2018. Iasplus.Com. https://www.iasplus.com/en/standards/ias/ias17
8 Michelle Gibbs, Emma Pratt. 2018. "AASB 16: Overhaul Of Lessee Accounting Effective 2019". KPMG.
https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-fundamental-overhaul-lessee-accounting.html.

factors such as mere passage of time, usage, interest rates of prices indices9. Below are some of
the benefits of a finance lease.
 There is usually a set arrangement of regular payments
 The upfront cost is usually minimal
 Rental expenses paid by the lessee are corporation tax deductible
 There is a possibility for the lessee to acquire the ownership of the leased asset at the
expiry of the lease term
 There is an additional line of finance for the lessee company which may not affect the
core banking arrangement of the firm.
Bibliography
9 Song, Xiaofei. 2016. "Changes In Lease Financing Practice During Lease Accounting Standard Overhaul (2005-
2014)". American J. Of Finance And Accounting 4 (3/4): 309. doi:10.1504/ajfa.2016.10001603.

"Accounting Standards". 2018. Aasb.Gov.Au. http://www.aasb.gov.au/Pronouncements/Current-
standards.aspx.
"Accounting For Leases: Presentation And Disclosures | Insights". 2018. Bakertilly.Com.
http://www.bakertilly.com/insights/accounting-for-leases-presentation-and-disclosures.
"Australian Accounting Standard AASB 16 Leases | Regulation Impact Statement Updates".
2018. Ris.Pmc.Gov.Au. https://ris.pmc.gov.au/2016/04/19/australian-accounting-
standard-aasb-16-leases.
"IAS 17 — Leases". 2018. Iasplus.Com. https://www.iasplus.com/en/standards/ias/ias17.
Knubley, Rachel. 2010. "Proposed Changes To Lease Accounting". Journal Of Property
Investment & Finance 28 (5): 322-327. doi:10.1108/14635781011069936.
Mills, Jones. 2017. "Thoughts On The Impact Of Changes To AASB 16?". Intelligent Investor.
https://www.intelligentinvestor.com.au/thoughts-on-the-impact-of-changes-to-aasb-16-
1878181.
Michelle Gibbs, Emma Pratt. 2018. "AASB 16: Overhaul Of Lessee Accounting Effective
2019". KPMG. https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-
fundamental-overhaul-lessee-accounting.html.
"New Leases Standard". 2018. Bdo.Com.Au.
https://www.bdo.com.au/en-au/accounting-news/accounting-news-february-2016/new-
leases-standard.
Song, Xiaofei. 2016. "Changes In Lease Financing Practice During Lease Accounting Standard
Overhaul (2005-2014)". American J. Of Finance And Accounting 4 (3/4): 309.
doi:10.1504/ajfa.2016.10001603.