Financial Accounting Report: Impact of AASB 16 on SIL Company

This report provides a comprehensive analysis of the impact of AASB 16, the new lease accounting standard, on financial accounting practices. It begins by identifying and describing the accounting concepts used by SIL, an Australian company, including compliance with Australian Accounting Standards and IFRS. The report then delves into the changes introduced by AASB 16, contrasting it with previous standards like IAS 17, and explaining the implications for lessees and lessors. Key areas covered include the definition of a lease, the impact on financial ratios, the challenges of implementation, and the differences between US GAAP and ASC 842. Furthermore, the report highlights the key disclosures required under AASB 16, emphasizing the recognition and measurement of lease assets and liabilities. The report concludes with a discussion of the overall impact of the new standard on financial reporting, including changes in asset and liability values, and profit and loss. The report also touches upon the company’s exposure to foreign currency fluctuations and the use of USD as a functional currency.

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Contents
Identification and description of the accounting concepts used:...............................................3
Changes in AASB 16:................................................................................................................3
Key disclosures:.........................................................................................................................6
Conclusion:................................................................................................................................7
References..................................................................................................................................8

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Identification and description of the accounting concepts used:
The company undertaken for review for the purposes of this assignment is SIL which is
limited by shares and which incorporated in the country of Australia and its shares are traded
on ASX. The following are the accounting concepts that have bene used by the company.
Wherever it is appropriate, the comparative information has been changed in order to be in
line with the current accounting policies.
The company have prepared the general purpose financial statements that have been prepared
as per the rules and regulations of Australian Accounting standards and interpretations.
Further, the financials of the company have been prepared on the basis of the rules and
regulations as have been laid down under Corporations act 2001. The company which has
been undertaken for review is a for profit company. The company has duly complied with the
rules and the regulation of IFRS as well, which is evident from the unqualified opinion
expressed by the auditors of the company on their respective financials.
The final accounts of the company have been prepared using the historical cost for the assets
and the liabilities. There is only one exception to it which is applied in the cases wherein the
method of fair value has been used. The company has also adopted the new rules of the
accounting standards which were to be applied on the company from January 1, 2018. The
company deals win revenue which has been recognised as per the provisions of AASB 15
which again deals with the revenue from the contracts with the customers and that are also in
line with the various amendments to the various standards in the country of Australia. There
have been certain revisions in these accounting standards that are also incorporated in it.
There are certain accounting standards that now require an increase disclosure in the
financials of the company (PWC, 2019).
There are some new standards and interpretations that have not been adopted by the company
but their application on the financials of the company are mandatory in nature as on
December 31, 2018. But these have not been yet adopted by the company.
In respect of the critical accounting estimates and judgments, the financials of the company
are in line with the relevant Australian standards on accounting which requires the use of
some specific accounting estimates and it also, requires the management to exercise their
respective judgment when it comes to the process of adoption of the policies of accounting.

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Changes in AASB 16:
The rules as have bene laid down under IAS 17 are same as that of IFRS 16. They both
require the right of use of an asset for the period of time in the exchange of the consideration
except from the use of the license of the intellectual property which is granted by the lessor.
The definition of the term lease is very different under IFRIS 4 and this would lead to a
different treatment of the contracts in the future. The rules under IFRS 16 includes some
special guidance with regard to the lease and the service. There is an increase impact over the
difference between the service and the operating lease and this is majorly due to the reason of
the change in the accounting treatment. This analysis initiates with the determination of the
fact if the contract meets the definition of lease. This merely means that whether the customer
has the control over the asset for the stated period and in exchange of some consideration
(IFRS, 2019).
Lease is very much importance since it helps the company in gaining an access to the
property, plant and equipment without the need to pay huge amounts of cash at the time when
the asset is taken. It help in providing the flexibility and also helps the lessees to address the
issue of the obsolescence and the residual value which is at risk. Honestly speaking, lease is
the only way through which the use of the physical asset could be done which is not available
for purchase or which is expensive (CFA Institute, 2019). The old rules require the
segregation between the operating and the finance lease which depends upon the complexity
of the rules and the rests, which mainly could use the bright lines which causes the similar
lease transactions being reported in the final accounts. The impact of the same is expected to
be major. The lessees are the people that would be affected by this new lease standard. There
is also a major impact over the business model and the lease products which changes due to
the changes in the needs and the behaviours.
With regard to lessees, these new rules would have an impact over the financial ratios and the
performance metric such as the asset turnover ratios etc. these new rules shall affect the loan
covenants, the credit ratings and the borrowing costs. The companies will have to reassess the
decisions with regard to lease and buy. The gearing ratios of the company would increase and
the capital ratios of the company would decrease. The nature of the expenses would also
undergo a change, the amount of the rent expense shall be replaced by the expense of
depreciation and interest and the pattern of recognition shall also change. The companies that
have some big fat assets such as the aircrafts etc shall be affected majorly. There shall be no

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effect on the assets such as laptops etc since these are of a lower value. The low value assets
are the one shows cost is worth less than $5000 (Mc kinsey, 2019).
These lower value assets are exempt from being reported in the balance sheet. The lessees
shall bear the brunt of the following of these new rules. These rules are not connected with
the in house lease information system.
With regard to lessors, the lessees and the lessors may require the consideration of re-
negotiating of restructuring of the existing and the future lease. The accounting for lessor
would remain unchanged under the new rules. These are the result of the change in the needs
and the behaviours from the customers that affects the mode of the business which is being
followed and the lease products.
The following are the challenges that the companies would face when it comes to the
implementation of the new lease standard: (Forbes, 2019).
 Under the rules of US GAAP, the operating leases are the expenses that are regarded
as the off balance sheet item. This requires the investor estimation of the operating
leases on the financial leverage and the earnings. As per the rules of ASC 842, there is
a requirement of the recognition of the liability which makes the payments of lease
and which has the right to use which represents the right to use for the underlying
asset over the term of the lease. The companies would have major amounts reported
in the balance sheet, even when there is an expense recognised in the final which is
likely to be affected by it. The companies that are retailer’s drug stores etc. are the
companies that would be affected by the introduction of this new accounting rules,
with an exception that the lease item of less than 12 months will be left out from it
(GAAP dynamics, 2019).
 With regard to the determination of the arrangement of lease, there is a certain
meeting of the bright line tests which means that there is a classification as an
operating lease and the off balance sheet treatment of lease. As per the relevant rules
as have been laid down under ASC 842, the leases that are of short term in nature
would be classified in the balance sheet. The way through which there shall be an off
balance sheet treatment is if the stated arrangement does not meet the definition of
lease. And also, the identification of the embedded leases in the contracts calls for a
major judgment. This criteria for classification of the arrangement of lease is very
much similar to the rule of US GAAP. But then there are some important differences,

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whether the lessee has right control over the asset or not. In case the lessee does not
an adequate control over the use of the identified asset, then the stated arrangement
shall not qualify as being a lease arrangement.
 In terms of lease payments, the origination costs of lease as have been laid down
under ASC 842 is very different from that of US GAAP. There is a specific definition
of the indirect costs which means a lower cost under the new accounting standard of
lease. Also, under the rules of US GAAP, all of the executory costs would not form
the part of the minimum lease payments. These are certain types of the costs that
forms the part of the lease payments that are used for the purposes of calculating the
lease liability and the right to use an asset.
 With regard to the sale leaseback transactions, the treatment of the stated item would
be different from US GAAP. Under the new requirement, an asset will have to be
transferred in order to qualify as a sale and it also must meet the rules recognising
revenue. In case, there is an absence of the sale of the asset from the perspective of
the seller lessee, then the buyer would not report the purchase of that asset. As the
result, both of the parties would consider and treat the lease as a financing lease. The
ASC 842 provides some new rules with regard to the determination of the lessee
controls over the asset before the date of the lease. This would lead in better
arrangements which is prone to sales leaseback requirements of accounting.
 There would be an increased financial disclosures under the new rules. The new rules
would mandates some qualitative and quantitative requirements for both the lessees
and the lessors. The examples include major judgments and assumptions.
Hence, each company must be able to address the above so that there are minimum issues
when it comes to implementing the new rules (Farr, 2019).
Key disclosures:
The AASB 16 deals with leases that lays down the way in which the amount of the lease is
recognised, measured and disclosed in the lease. These new rules lay down the use of one
model of lessee that requires the lessees to recognise the assets and the liabilities in their
financials. AASB 16 is applicable on the period on or after the date of January 1, 2019. As
the end of the year, the company has the non-cancellable undiscounted operating lease
commitment of an amount of USD 62,295,000. The company lease out the land and building
for being used in the business operations. The impact of the new lease standard would lead to
an increase in the total amount of the assets and the liabilities since there would be a

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recording of the fair value of the future ease payments and a corresponding asset will have to
be reported in the financials with regard to the same. Also, there would be a decrease in the
amount of the net assets which is mainly due to the reduction in the amount of the capitalised
asset following the straight line basis when on the other hand, the principle amount of the
payments made in their behalf will have to be reduced. The amount of the net assets shows a
greater amount of increase, which is mainly due to the liability which has been reported as
current. The profit and loss of the company is exposed to changes in the foreign currency due
to fluctuations in the exchange rates. The company has used the USD functional currencies
which is mainly due the fact that the sales and the cost of goods sold of the company are
expressed in US dollars. The amount of the operating lease are expressed in the currency of
the country of operation. The right to use an asset is reported at their respective cos and does
not undergo any revaluation but the liability is financial in nature and so, the same is subject
to being revalued through the statement of profit and loss. The company will have to incur an
increased amount of interest which is mainly due to the application of the new accounting
standard and also, since the company will have to apply the effective interest rate in respect
of which initial liability was reported. Due to the fact that the company has a higher principal
liability and a lower life of the lease, which leads to a fluctuation in the profit over the period
of the lease, the expenses in respect of these leases would be high. Such leases will have the
effect of being mitigated due to the presence of the number of leases that are held with the
smart end dates. The amount of the operating cash flow is much higher since the amount
which is to be repaid on the principle portion of the lease liabilities will have to classify as the
financial activities. There is an absence of any standards that are not effective yet and this
would require a certain degree of materiality impact when it comes to the reporting of the
transactions in the current or in the future periods and also on foreseeable future.
There is a certain degree of risks and rewards with regard to ownership that will have to be
retained by the lessor which would form the part of the operating lease. The payments that
are reported under the operating leases is the net amount of the incentives that had been
received from the lessor and this amount would be reported in the consolidated final accounts
using the straight line basis over the years of the lease.
With respect to the finance leases, the company lease some of its property, plant and
equipment. This is where the company is exposed to various risks and rewards associated
with the ownership which is classified as the finance lease. These amounts of the leases shall
be added to the cost of the asset when the lease period starts. This amount is lower of the fair

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value of the lease asset and lease payments. The expense of the lease is divided between the
liability charges and the finance charges. The interest portion in the fiancé cost shall be
charged on to the consolidated statement over the period of the lease. This is mainly due to
the reason that there is constant periodic rate of interest on the balance which is remaining for
the period (Speed cast, 2019).
Conclusion:
The new accounting standard would require an increased number of disclosures for the
company. But the companies are also exposed to challenges that affects the operations of the
company. There are some specific conditions that have to be fulfilled in order to qualify for a
sale arrangement, the absence of which would result in not reporting of the relevant sale and
the purchase of the asset. Also, the relevant disclosures have been made by the company
under review with regard to the leases.

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References
CFA Institute. (2019). IFRS 16 & US GAAP-ASC 842: New Lease Obligations. [online]
Available at: https://www.cfainstitute.org/en/advocacy/policy-positions/leases-what-
investors-need-to-know [Accessed 1 Oct. 2019].
Dynamics, G. (2019). Top 5 Biggest Changes with the New Lease Accounting Standard (ASC
842) | GAAP Dynamics. [online] Gaapdynamics.com. Available at:
https://www.gaapdynamics.com/insights/2016/08/16/top-5-biggest-changes-with-the-new-
lease-accounting-standard-(asc-842)/ [Accessed 1 Oct. 2019].
Forbes.com. (2019). Impact Of Operating Leases Moving To Balance Sheet. [online]
Available at: https://www.forbes.com/sites/greatspeculations/2018/05/01/impact-of-
operating-leases-moving-to-balance-sheet/#2f2a86bb2c55 [Accessed 1 Oct. 2019].
Liz Farr, C. (2019). Changes to Operating Leases Under the New Lease Accounting
Standards. [online] Firm of the Future. Available at:
https://www.firmofthefuture.com/content/changes-to-operating-leases-under-the-new-lease-
accounting-standards/ [Accessed 1 Oct. 2019].
McKinsey & Company. (2019). A welcome change in lease-accounting rules. [online]
Available at: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/
our-insights/a-welcome-change-in-lease-accounting-rules [Accessed 1 Oct. 2019].
Pwc.com. (2019). IFRS 16: The leases standard is changing Are you ready?. [online]
Available at: https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-
leases.pdf [Accessed 1 Oct. 2019].
Speedcast.com. (2019). Investor Relations | Speedcast Stock Information | ASX SDA Stock
Symbol | Speedcast. [online] Available at: https://www.speedcast.com/investor-relations/
[Accessed 1 Oct. 2019].