Financial Accounting Report: Impact of AASB 16 on Leasing Contracts

This report provides an analysis of Australian Accounting Standard 16 (AASB 16), which addresses lease accounting. It examines the transition from AASB 117 to AASB 16, highlighting key changes in accounting practices. The report explores the significance of contracts in leasing agreements under AASB 16, emphasizing the importance of contract terms and conditions. It also discusses the impact of substantive substitution rights on lease agreements and how these rights affect the classification and accounting treatment of leases. The report details the implications of AASB 16 on financial statements, including balance sheet and income statement impacts. It focuses on the new standard's influence on lease classification, financial reporting, and the overall accounting procedures related to leases.

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

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Executive Summary
This current report has focused on Australian Accounting Standard 16 which mainly deals with
the process of leasing. The study mainly sheds light on the changes in the accounting standard
AASB 117 on leasing to AASB 16 “Leases”. It also includes the important or the significance of
the contract in the overall agreement of the leases as per the newly implemented accounting
standard. Classification of the leases also points out the account that points out the users of the
financial statement who would be beneficial with this financial information. In addition to this,
the overall impact on the substantive substitution right on the agreement of leases has also been
discussed in this study.

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Table of Content
Introduction......................................................................................................................................3
IASB/AASN decided to change the accounting standard on leasing and replaced AASB 117 with
leases with new accounting standard AASB 16..............................................................................3
Significance of contract in leasing agreement as per AASB 16 leases...........................................6
Impact of substantive substitution right on the lease agreement.....................................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
Financial accounting is the process of analysing the reporting of financial transaction that
have already taken place in an organisation after implementation of certain accounting standards.
Use of the standardised guidelines involves in the process of presenting the financial statement
which points out the accuracy as well as the availability of the financial information to the
people. In this study, Australian Accounting Standard 16 has been taken in to consideration
which mainly deals with the leases that are associated with the organisation and their functions
for a certain period of time. Contract on lease agreement has also been included along with the
substantive rights on the agreement of lease.
IASB/AASN decided to change the accounting standard on leasing and replaced AASB 117
with leases with new accounting standard AASB 16
AASB 16 is the new accounting standard for lease accounting which is mainly published
by Australian Accounting Standard Board in the month of February 2016. This particular
accounting standard mainly help in changing the ways which the companies would calculate for
the lease accounting (Joubert, Garvie and Parle 2017). The balance sheet and the income
statement of the company mainly uses this accounting as it deals with leases and that have to be
associated with the major accounting loopholes of earlier accounting standard that is AASB 117.
The off balance sheet operating lease points out the accounting lease which have to be associated
with the new lease standard that are heavily based off the IFRS 16. The lease standard that are
international in nature mainly points out the major accounting faults that are included with
AASB 117 and for that reason AASB 16 is required to be implemented for enhanced
performance (Xu, Davidson and Cheong 2017). Lease accounting is the standard that mainly

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help in defining the company which have to be associated with the contract and mainly allows
the party for using of another assets.
The assets that are being used by another party mainly includes the exchange of
consideration which have to be classified with capital leases or the operational leases. The new
standard of lease accounting is also required to be introduced to the existing standards for
making the implementation procedures (Petschler 2018). The companies that would change the
overall accounting for leases which might affect their business procedures in their normal course
of business. The overall changes that have been noticed in their overall course of business mainly
operates in the classification of leases. This also includes the overall classification of leases
along with eliminating the ability of the organisations in their reporting standards on the financial
statements. Changes in the operation of leases is mainly included in the footnotes which
corporates the financial statement of the companies along with highlighting the true nature of the
business (Brumm and Liu 2019). The exposure of drafts with the response of work writing along
with reviewing the statement of finances.
At the time of amendment, IASB releases the IFRS 16 and soon the AASB follows the
system with certain correction that are genuinely required for the overall statement of accounting
of leases. AASB 16 forces to close the AASB 117 by pointing out the loopholes that are required
to be included for all operating leases which are required to be accounting for finance lease
(Bhattacharya 2016). This mainly highlights the part of a contract that mainly conveys the right
to use the allocated assets that are available within the companies along with pointing out the
issues in it. There are three criteria for the overall contract which have to be qualified with a
lease in the organisation. The right use of the contract is to be qualified with the criteria and that
have to be associated with the standard of accounting. The first and the foremost point is the

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identified assets which have to be presented within the company for implementing the
accounting standard. The assets can only be identified with the physical distinctive with the
leases and that have to be received with substantial manner (Hana and Patrik 2017). Substantial
capacity of the assets includes the lessor that might not have the substantive rights for the process
of substituting the assets. The second points mainly highlights the economic benefits that
received in their overall course of business.
The lessee is required to receive the substantial matter of all the economic benefits which
points out the quality that are required to be used for lease accounting. Qualifying with the
substantial matter mainly defies the economic benefits which are required to have the benefits of
the assets and allocation of benefits for the time period (Nobes and Zeff 2016). The direct use of
the assets is also required to be associated for highlighting the new lease accounting and that
have to be pointed by the right use of assets. The procedure of utilising the assets is used to be
predetermined and the lessee would also have the right to operate the assets that are being
disclosed with the company. Determining the assets with designing is also another aspect that
included with effective challenges are required to be faced within the process of lease accounting
(Svoboda and Bohušová 2017). There are certain impact on the financial statement of the
company due to the changes in the accounting methods of leases and its standard.
Under the method of AASB 16, assets are to be presented in the balance sheet which
would be provided by the lease liability for each leases that are hold by the company.
Consideration of the financial leases meets the low value and the expectations that are short term
in nature which have to be associated with the financial metrics of return on assets (Morris
2017). The assumptions would be influenced with the addition of the new assets along with the
liabilities in the balance sheet. The impact on the income statement is also been seen with the

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changes in the financial statement that points out the leased assets. The report of the company is
to be included with the depreciation for the leased assets and that have to be associated with the
interest expenses which have to be included with the finance costs in the section of profit and
loss (Marşap and Yanık 2018). The lease liabilities with the cost of finance is also to be
presented in the income statement and that have to be included in each period of time. Therefore
these are the reasons for which AASB 117 has been replaced with AASB 16.
Significance of contract in leasing agreement as per AASB 16 leases
Contract is a type of legal agreement between two parties or more for an item or
something that includes monetary transaction. On the other hand, lease is the contract that mainly
points out the terms on which the parties would like to agree upon (Holland 2016). The overall
bindings of contract mainly stipulates the duties which have to be associated with each parties
along with maintaining the agreement that are enforceable by each parties. A certain amount of
security deposit is required to make which would act as the security on which the leases have to
be made within the parties. Breaking the lease might face some of the consequences which have
to be highlighted from the range of mild to severe along with depending upon the circumstances
that are broken for some aspects. As per AASB 16 leases, the significance of contract in leasing
agreement mainly highlights the effective role in allowing the contract for under certain set of
condition on which the agreement is based on (Kusano, Sakuma and Tsunogaya 2016). Some of
the leases that are commercial in nature requires to pay certain amount for paying of the
operational costs along with other costs that are being incurred.
Some of the leases are required to pay the property taxers which takes the overall
responsibility of the owners that are responsible for other costs. A lease is required to be
identified that mainly conveys the right of control along with the identified assets within the time

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for period of consideration (Wong and Joshi 2015). The guidance of assessment is to be
described with the terms of amount that mainly used with the identified assets. An organisation is
required to reassess the overall content of the contract only if the terms and the condition are
changed with certain aspects. The overall components of the contract are required to be utilised
with the account of each lease and that has to be applied with the applied with the practical
assumptions of lease. The in general ties of contract basically stipulates the obligations which
need to be related with each parties at the side keeping up the assertion that are enforceable by
each parties (Grenier, Pomeroy and Stern 2015). A certain sum of security deposit is required to
form which would act as the security on which the leases ought to be made inside the parties.
Breaking the lease might confront a few of the results which need to be highlighted from
the extension of gentle to serious alongside depending upon the circumstances that are broken for
a few aspects. As per AASB 16 leases, the importance of contract in renting assertion primarily
highlights the compelling part in permitting the contract for beneath certain set of condition on
which the understanding is based on (Paik et al. 2015). A few of the leases that are commercial
in nature requires to pay certain sum for paying of the operational costs at the side other costs
that are being brought about. A few of the leases are required to pay the property taxes which
takes the generally obligation of the proprietors that are capable for other costs. A rent is
required to be distinguished that basically passes on the proper of control beside the recognized
resources inside the time for period of thought. The direction of evaluation is to be depicted with
the terms of sum that primarily utilized with the distinguished resources. An association is
required to reassess the in general substance of the contract as it were in case the terms and the
condition are changed with certain viewpoints (Gimbar, Hansen and Ozlanski 2016). The by and

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large components of the contract are required to be used with the account of each rent which
must be connected with the connected with the down to earth assumptions of lease.
This specific accounting standard basically offer assistance in changing the ways which
the companies would calculate for the lease accounting. The off adjust sheet working lease
focuses out the accounting rent which need to be related with the modern lease standard that are
intensely based off the IFRS 16. Lease accounting is the standard that primarily offer assistance
in characterizing the company which got to be associated with the contract and primarily permits
the party for utilizing of another resources (Chambers and Dooley 2015). The unused standard of
rent bookkeeping is additionally required to be presented to the existing measures for making the
implementation methods. The by and large changes that have been noticed in their by and large
course of commerce primarily works within the classification of leases. Changes within the
operation of leases is primarily included within the references which corporates the financial
explanation of the companies in conjunction with highlighting the genuine nature of the business.
The resources can as it were be distinguished with the physical particular with the leases which
need to be gotten with considerable way. Qualifying with the considerable matter primarily
opposes the financial benefits which are required to have the benefits of the resources and
assignment of benefits for the time period. The method of using the assets is used to be
foreordained and the tenant would too have the correct to function the resources that are being
uncovered with the company (Chatfield, Chatfield and Poon 2017). Deciding the resources with
planning is additionally another viewpoint that included with viable challenges are required to be
confronted inside the method of lease accounting. Beneath the strategy of AASB 16, resources
are to be presented within the adjust sheet which would be provided by the leases risk for each
leases that are hold by the company. The lease liabilities with the taken a toll of back is

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additionally to be displayed within the salary articulation which ought to be included in each
period of time.
Impact of substantive substitution right on the lease agreement
The overall impact of the substantive substitution right on the lease agreement points out
the assets which have to be associated with the supplier of the assets within the organisation. The
substantive rights along with the period of usage includes the substantive nature along with the
application of the condition. The condition that are present are required to follow points out the
substitution right and that have to be associated with the lease agreement (Cheng 2015). The
practical ability of the supplier is mainly used to substitute the alternative assets that are present
in the company which have to be used within the financial year. The alternative assets are
required to be ready within the supplier that points out the process of substitution of the assets
and that have to be sources within the reasonable period of time. The benefits of the suppliers
would be economical as per the exercise of the right along with pointing out the right of
substitution of assets. The economic benefits that are directly associated with the cost are
required to be included within the accounting year. The selected supplier also gets certain
benefits from the exercise that would like to enjoy the right of the assets and their occurrence on
the particular date.
The obligation of the substitution to the assets mainly includes the on the particular date
which points out the specific date of occurrence of the event. The selected supplier might be
facing certain obligation on the substantive right which have to be agreed with the customers.
The overall evaluation of the entity points out the right of the substitution and that have to be
based on the facts along with the circumstances of the contract in lease accounting (Chatfield,
Chatfield and Poon 2017). Excluding the consideration of the future points out the inception

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which are required to be associated with the contract of lease accounting. The likely of
occurrence would be considered for the evaluation along with including the agreement. The
agreement by the future customers is required to pay at the current rate in the market for using
the assets along with other aspects of rights in the lease agreement (Aasb.gov.au 2016). The new
technology is also required to be introduced which has been not substantially developed within
the inception of the contract. The overall difference between the uses of the assets by the
customers along with the performance of assets is to be included in the contract. The overall
performance is also to be considered at the inception of the contract that are excluded with the
method of evaluation.
The assets that are located in the premises of the customers includes the costs that are
associated with the method of substitution that are higher in nature. The location of the supplier
premises also includes the costs that are directly associated with the substitution as they are
located on the premises of suppliers (Gimbar, Hansen and Ozlanski 2016). This mainly more
likely to gets exceeded with the benefits along with substituting the assets. The right of the
supplier along with the obligation mainly substitute the assets for repairing and maintenance and
if the selected assets is not operated properly then the technical upgrade might not be facilitated
for upgrades. The technological updates mainly plays an important role in providing the
availability of upgrades which provides the customers to use on the right of the assets that are
identified in nature. The customers might not be ready for determining the position on which the
supplier would react on the substantive substitution right (Grenier, Pomeroy and Stern 2015). In
this particular case, the selected customers might be presumed with any kind of substitution right
that might not be substantive in nature. In addition to this, the portions of the assets is also
included in the part of substantive substitution right on the lease agreement.

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It mainly points out the capacity portion of the assets that are identified with the within
the entity along with the physical distinction. It also refers to the capacity or the portions of the
selected assets that might not be distinguished physically. As an identified assets, the
representation of the substantial matters also includes the assets which thereby provides the
capacity of the customer’s along with the rights for providing certain types of economic benefit
(Kusano, Sakuma and Tsunogaya 2016). Therefore, it can be clearly seen that the assets that are
identified by the company includes the effective specified with the impact on their contract that
are required to be associated with the substantive substitution right. The condition that are
present are required to follow points out the substitution right and that have to be associated with
the lease agreement. The obligation of the substitution to the assets mainly includes the on the
particular date which points out the specific date of occurrence of the event.
Conclusion
The above study can be concluded that the Australian accounting standard board has been
considered and leasing has been specifically considered in the study. It is an important activity
for most of the organisations and that have to be gained with the access of assets along with
obtaining the finance and reducing the exposure of the entity. Moreover, the users of the
financial statement also points out the process of leasing which have to be associated with the
activities of the accounting model. The companies that would change the overall accounting for
leases which might affect their business procedures in their normal course of business. The
practical ability of the supplier is mainly used to substitute the alternative assets that are present
in the company which have to be used within the financial year. Different types of leases have
been described in the study which also sheds light on the faithful representation of the
transactions that deals with leases.

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https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf [Accessed on 27 January
2020]
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Accounting, 3(1), pp.13-22.
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p.449.
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CPA Journal, 85(1), p.38.
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New Lease Accounting Standards?. The Journal of Hospitality Financial Management, 25(2),
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