HI6025 - Accounting for Leases: A Critical Review of AASB 16

This report critically examines AASB 16, the Australian accounting standard for lease financing, highlighting its significance in providing users with comprehensive financial statements. It compares AASB 16 with the previous AASB 117, discussing the reasons for change, the evolution of the IASB/FASB joint leasing project, and the impact on Australian organizations. The report covers the incorporation of changes in the new standard, emphasizing the single accounting treatment for lessees and the recognition of right-to-use assets and lease liabilities. It also addresses the concerns and criticisms of existing standards, the need for transparent financial reporting, and the consultations conducted during the development of IFRS 16, similar to AASB 16. The analysis includes insights into the experiences and knowledge gained through the joint lease accounting work group.

AASB
1
AASB
May 17
2019

Abstract
Leasing is a most significant activity and it is broadly used for long-term as well as short-term
asset financing in many entities. Because of pervasiveness of the leasing, it is significant to
provide users with complete furthermore with understandable economic or financial statements
in order to understand the leasing activities of the entity. This report outlines the importance of
new AASB 16 leasing standard, which enter into force after January 1, 2019. This report analysis
is based totally on information collected from AASB journal articles, website, and professional
websites as well as from academic literature. Evaluation of this report includes the comparison of
the existing plus new leasing accounting standards to illustrate the benefits plus improvements
gained from the existing AASB 117 standards. Due to few limitations of the existing AASB 117,
as well as new AASB 16 was discovered. In addition, ISAB and FASB conducted a joint
investigation into the evolution of a “lease project” and found widespread consultations to
complete the absolute IFRS 16, similar to the AASB 16, the results of a “lease project” enhanced
loyal representation as well as all users provide consistent information in their financial
statements. Finally, this report will give information for the Australian firms that will accept a
new AASB 16. This report will also assess the changes moreover impact of the AASB 16 on the
ASX listed firm.
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Contents
Abstract............................................................................................................................................2
Introduction......................................................................................................................................4
AASB 16..........................................................................................................................................4
Conclusion.....................................................................................................................................13
References......................................................................................................................................15
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Introduction
Australian Accounting Standards Board creates problems and puts the Australian Accounting
Standard, including economics. An Australian Government organization under an Investor's
Commission and the Australian Securities Act 2001. The ASB 1057 separates the usage of the
Australian accounting standard from the usage and budget content standards. AASB forms a
system of Tier's Division of 1053 AAS applications, in which two levels are identified to obtain
the required budget reports. A.A.A.B.B. 16 Existing and Single Tenants is the book's model and
during the year there is a resident of the group to identify all the leases and liabilities and
resources, if hidden resources are of lesser respect. Australia is building a new Hub for Business
Gala (that, Evans and He, 2016). Although it is a small business or establishment for a large
scale industry, it is rich with Australian resources and it is a great crowd and the world forum.
Everyone tries to serve the country on a temporary basis and therefore likes to buy the least
assets and liabilities. Corporate offices, commercial units, rental cars, rental facilities, laptops are
also considered on the basis of lease. Leasing options have been quoted below the one-business
balance sheet for several decades, they only worked on income statements and systematic
expenses were covered systematically (Comiran and Graham, 2016).
AASB 16
Evaluation of old accounting standards of lease AASB 117
The purpose of this report is to give a deep understanding of the AASB 16, and which will
replace the present rental AASB 117 standard. The three major themes to be covered in this
study are a comprehensive comparison of AASB 117 and AASB 16 lease accounting along with
change reasons, IASB/FASB The evolution of the joint leasing program and its results, as well as
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the future impact of Australian organizations adopting AASB 16. Therefore, development of the
draft/version of each phase of a standard will be examined to explain the evolution as well as
final results of IASB/FASB joint “lease project” (Voltoon, 2016). Then, the actual issues
involved in adopting and implementing the AASB 16 moreover the impact on Australian
company financial statements will be reviewed. This study will further strengthen the
comprehension of new leasing standard AASB 16, improve the identification criteria for leasing-
related assets as well as liabilities, and increase transparency. As per the AASB 117 and IAS 17
lease, lessee must recognize any lease classified as “financial rent” in a statement of the financial
position leased assets and related liabilities, while other lease assets and related liabilities are
allowed completely to be in the balance sheet (i.e. Balance sheet resulting from “operating
leases”). Recognizing that failure to report liabilities and assets related to the operating leases in
a lessee's statement of the financial position might result in misleading data due to failure to
provide a true statement of the lease transaction, the standard setter has decided to cancel the
lease classification as an operating lease and financing in accordance with the AASB 117 / IAS
17 requires tenant leases and introduces a single tenant accounting model for the leases for a
period of almost 12 months (Evans and He, 2016).
Change necessary
Due to US Securities and Exchange Commission, stakeholders as well as other users expressed a
lot of concerns, the IASB and FASB gathered "lease projects." Existing standards have been
criticized for the failing to offer a realistic representation in a financial statement because users
cannot fully understand the financial status of the company's lease transactions. In addition, the
SEC’s notification of off-balance sheet activities in 2005 resulted in opaque lease obligations in
the financial statements. AASB 117's off-balance sheet leasing commitment resulted in a large
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lack of information, authorizing listed firms to disclose nearly $3 trillion. Hence, the new rental
standard AASB 16 was simply introduced to terminate all disputes. The AASB issued the lease
AASB 16 in 2016. AASB 16 contains IAS 16, leasing, issued by IASB, without modification.
For customers (lessees), the standard introduces the single accounting treatment that recognizes
the right to utilize the assets as well as lease liabilities. For the lessor, the difference between
financing as well as operating leases and the accounting treatment of the lease remain essentially
unchanged. The standard replaces the previous standards and related interpretations and
introduces new lease definitions to determine whether the contract includes the lease AASB 16
effective after January, 2019, only in AASB 15 “Customer Contract Revenue” (AASB 15) it is
allowed to be used in advance if it is also applicable (Stevenson, 2012).
Changes that have been incorporated in the new accounting standard for lease AASB 16
When a new standard AASB 16 cancels balance sheet lease classification in AASB 117 and
treats all leases as finance leases, the lessee's AASB 117 classifies the lease as the operating
lease and finance lease. However, exemption applies to less than almost 12 months of lease
(short term) moreover low value skill leases. The main objective of a project is to recognize each
and every lease as a used asset, to include all leased assets in balance sheet, and to capitalize all
leases. In addition, in order to make the potential lease payments, companies need to fulfill their
obligations when recognizing their financial liabilities, and when lease payments are always
made over the time (Song, 2016). Since the existing AASB 117 lessor framework has been
transferred to the AASB 16, however the disclosure procedure has been enhanced; no major
changes have been made to the lessor. The proper treatment of a residual value guarantee is the
major differences between the present as well as new standards. In addition, a leveraged lease
mode in the AASB 16 is deleted when the earlier standard AAB 117 allowed net resource non-
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resource debt. Compared to AASB 117, the lessor needs to disclose additional information about
risk management linked activities (such as the remaining equity of the asset, which needs to be
leased) in AASB 16. In addition, other limited changes have been made to make the same
definition for the lessor and tenant accounting models (Kusano, Sakuma and Tsunogaya, 2012).
Companies that have a significant level of lease financing be affected by the change in
accounting standards for lease
FASB introduced the new accounting standards, which require companies to identify operating
lease property and liabilities in their balance sheets. The forensic accounting technique has
implemented this practice since the beginning, so all the models as well as research have been
reflected and will maintain to reflect all this changes. A firm can lease the property in one of the
two methods: Capital lease or operating lease. Work efficiently as the owner of the relevant
property of the lease of the lease (Maurice, 2017). A very easy analogy is buying a car or a home
loan; by paying regularly, at the end of the term, the property returns to the fully paid debt. The
operating straps do not reassign ownership of an underlying assets and pay for the use of assets.
Simple correlation here is to hire a car from the dealer; the lessee gives the right for the usage of
car, however it does not get the rights of the car, nor is it the owner of the car at the lease end.
Prior to such a new accounting standard, the GAAP should have liabilities and assets related to
capital levies on the organization's balance sheet. Typically, such leases are related to property,
equipment, and plant, hence the capital lease properties are filed in PP and E and lease liabilities
are recorded in loans and other liabilities. Conversely, although the entity is using the asset and
the contract is obliged to pay the lease, operating leases (assets as well as liabilities) have not
been reported in the balance sheet (Lin and Graham, 2017). Before this change, separate
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depreciation moreover interest expenses are required for capital leases, whereas lump sum
payments or rental fees are required for operating leases.
Positive accounting theory relate to the behavior of managers
Allow the lessor to submit assets on a balance sheet based on the type and nature of the assets
they are allotted. Income from leased assets is determined on the straight-line starting point.
Before the end of lease period, the income is deprived of any additional costs and expenses and
goes directly into the operating profit column (Lin and Graham, 2017). The amount of capital
invested, combined with the depreciation used to collect income from the leased assets, is carried
out under the heading of the fee. There are other reasons to ensure a letter from the business only
if the user is not on a straight line basis from the system's cash flow. All expenses incurred
during the signing of the lease agreement are refunded upon expiration of the term of office and
are added to the company's income statement as a return on investment. The management of the
lease agreement ensures that the company benefits the most and obtains profitable results. Since
the assets are not included in company's financial balance sheet, long-term changes can be made
and this option can only be used if an operating lease agreement is selected. Top managers are
not responsible for any failures in the system, so they don't care about the assets reaching the
desired level (Morris, 2017).
According to IASB, the implementation of IFRS 16 is expected to improve comparability
between the companies that lease assets and companies that borrow to buy assets.
The joint lease the accounting work group was simply established by IASB as well as FASB to
gain more practical experience moreover knowledge. Over 1,700 comments were analyzed and
public consultations were organized on the development of IFRS 16. The comprehensive
consultation was conducted through the organizing of the 2009 (discussion document), 2010
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(draft for comment) and 2013 (revised draft for comments) (Kusano, Sakuma and Tsunogaya,
2012). Hundreds of the meetings, 15 open round tables, moreover countless outreach programs.
Apart from this, the global accounting firm, stakeholder, regulatory, standard settlers, and lessee
and tenant in financial statements are widely discussed. The 2010 Exposure Draft (ED) considers
the response from the 2009 discussion study to re-examine the proposed needs. In 2010, the
Revised Exposure Draft considered the concept of "rights to use" in the 2010 Exposure Draft, to
eliminate operational expenses and to adopt lease capitalization, Single Lease secretarial
Standard. In 2016, the 2013 ED, the feedback on the board's consultation and consultation was
maintained, keeping in mind the completion of the new lease standard the IFRS 16. Results of
the IFRS 16 greatly reduced all disputes. The property and liabilities of the company can be
recognized in the balance sheet for the more credible representation, thereby increasing
transparency. The comparison between the lessee and the lessee has improved. Apart from this,
the need for adjustment of common practices has ended because of excessive depreciation plus
depreciation of the over-balance sheet issuance. AASB16 will get better credit plus good
investment decisions by facilitating better the capital allocation for both investors as well as for
companies (Song, 2016). The most important impact on Australian companies adopting AASB
16 is to increase on-balance sheet leasing, lease holding and liabilities. Expectation of major
financial ratios for example leverage ratio is expected. In addition, companies with significant
off-balance sheet leasing will be heavily influenced by costs for example systems and process
settings, and when measuring lease assets moreover lease liabilities, plus discount rates with
external parties will be determined by the current price. Enter the information of the changed
report. However, depending on a size of the rental portfolio, the cost of the company may vary
greatly. Industries with many high-value leasing companies will be severely affected, for
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instance real estate, retailers (many outlets) and real estate and construction firms. The data
required for AASB 16 is similar to the data of AASB 117, in addition to applying AASB 16, the
discount rate (required for leases).
Implementation of AASB 16 has an effect on leasing market.
IASB has released IFRS 16 - New Rentals Standard. It came into effect in 2019. In fact, each
company uses leases and leases as a way of obtaining assets and is therefore subject to new
standards. Latest requirements virtually eliminate all the off-balance reports accounting for
tenants and also redefine many general financial matrixes for example EBITDA and gearing
ratio. This will improve the comparability; however it can also affect the contract, borrowing
costs, credit rating, as well as stakeholder assumptions of the organization. New standard can
affect the lessee's business model and products, because the rental needs and the lessee's
behavior will change. This lease can accelerate the current development of the market, such as
paying more attention to services than physical assets (Spiceland, Spiceland and Njoroge, 2018).
The change of lease to accounting standards has a profound effect on the tenant's business
processes, systems and controls. For almost all leases, in the balance sheet, the lessee will need
more data than before lease. Companies need to implement not only accounting but also a cross-
functional approach. This enables companies to initially use and use properties and equipment
without generating large cash flows. The old and residual value also provides flexibility to
enable rentals to solve the problem of risk. In fact, leasing is only to gain access to those physical
assets that cannot be bought (Howieson, 2017). Under current rules, leasehold transactions or
financing based on complicated rules and tests are given to the transaction as rent. In practice,
these rules and tests sometimes use a "shiny line" on the financial balance sheet. Not all identities
of all or similar lease transactions have been received. The impact on leaseholders' financial
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reporting is expected to be significant, asset financing, processes and controls. The new lease
standard will make the money earners very impressed. The fewer accountants remain unchanged.
However, due to changes in demand and behavior, they can see results on their commercial
models and lease products. The new standard will affect performance indicators such as almost
all used financial properties and leverage ratio, current ratio, asset business, interest coverage,
EBITDA, EBIT, EPS, ROCE, ROE as well as operating cash flow. These changes affect the debt
contract, the credit rating and the cost of borrowing and other behavioral changes may be the
reason for this (Stevenson, 2012). These results force many organizations to re-evaluate some
"lease and purchase" decisions. Increase the balance sheet, increase asset-liability, and reduce the
capital cost. There will also be changes in cost features (rental charges and depreciation and
depreciation expenses) and identity models (increasing rent charges for today's operating lease
identification model). The "big" property leasing organization, with real estate, production
equipment, aircraft, railways, ships and technology, is expected to be very impressed. The reason
for this is that IASB offers low-cost assets (new assets worth $ 5,000 or less), reducing the
impact of large strips (such as tablets and personal computers, small office furniture and phones).
The lesser value fulfilling this discount should not be recognized in the assets balance sheet. For
many rental tenants, the costs of following and implementing new rentals may be high,
especially if they have a system not having internal rent information. Ledgers and Committees
may need to consider redistribution or restructuring of existing and future leases. It should also
be assessed that the business and legal structure supporting. Less accounting remains largely
unchanged from the IAS 17, but it is expected that changes and transactions of a customer's
demand affect their commercial model as well as rental products (Walton, 2016).
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Australian Accounting Standards AASB 16, Leasing (Standard or AASB 16) was released in
2016 and became effective on or after January 1, 2019, which means that for many Australian
entities, this change will be 2020 Effective on the 30th of the month – end. For the lessor, the
difference between financial and operating leases remains essentially unchanged. Previous high-
level analysis of telecom operators' current financial statements revealed that EBITDA margins
may increase by the average of approximately 2.5% points. Previous studies by the world's 50th
biggest telecom operators show that the balance sheet will add $125 billion in the usage rights
possessions, and total debt will increase by 15-20%. Standards have had a profound impact on
the tenant systems and controls. Almost all “off-balance sheet” lease cancellations require more
data than previously captured. Considering the large number of lease arrangements entered into,
the telecommunications carrier should assess the impact of a standard and also notify the key
stakeholders of any relevant changes at an early stage.
Key disclosures on financial reporting of Atomos Ltd:
Atomos Ltd: On August 31, 2018, the company issued 7,000,000 convertible notes with a face
value of $1.00 per share and a principal amount of $7,000,000. Interest is paid at 10% per
annum. The convertible notes matured on 31 December 2019. If the Company receives an
unconditional confirmation from ASX that it will be allowed to enter the official list, the notes
will be automatically converted into fully paid common shares (Comiran and Graham, 2016).
The main features of Atomos Ltd's AASB 16 are as follows:
Lessor account
Unless the value of the underlying asset is reduced, then the lessee should confirm all the lease
properties and liabilities on of Atomos Ltd's balance sheet for a period of more than 12 months.
Assets as well as liabilities of Atomos Ltd's arising from leases are initially evaluated and
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