Implications of IFRS 16 on Lease Accounting for Various Industries
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AI Summary
The transition from IAS 17 to IFRS 16 marks a significant shift in lease accounting standards. Previously under IAS 17, leases were classified as either operating or finance leases with distinct treatments; however, IFRS 16 mandates all leases to be recognized on the balance sheet, significantly altering financial statements and key ratios. This change notably impacts sectors heavily reliant on leasing, such as airlines, retail, and shipping, by increasing reported liabilities and affecting debt-equity ratios. The new standard aims to enhance transparency in financial reporting, providing stakeholders with a clearer picture of companies' lease obligations and improving comparability across entities. While listed companies face considerable adjustments under IFRS 16, unlisted firms may experience less impact due to different reporting requirements. Overall, the implementation of IFRS 16 is anticipated to lead to more accurate asset valuation, better capital allocation decisions, and potentially drive economic growth by reflecting a company's financial position more truthfully.
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Running Head: Advanced Financial Accounting
Advanced Financial Accounting
Advanced Financial Accounting
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Advanced Financial Accounting 2
Table of Contents
Task A...................................................................................................................................................3
Part (i)................................................................................................................................................3
Part (ii)..............................................................................................................................................3
Part (iii).............................................................................................................................................3
Part (iv)..............................................................................................................................................3
Part (v)...............................................................................................................................................4
Part (vi)..............................................................................................................................................4
Part (vii)............................................................................................................................................4
Part (viii)...........................................................................................................................................5
Task B...................................................................................................................................................6
Question 1.........................................................................................................................................6
Question 2.........................................................................................................................................6
Question 3.........................................................................................................................................7
Question 4.........................................................................................................................................7
Question 5.........................................................................................................................................8
References:............................................................................................................................................9
Table of Contents
Task A...................................................................................................................................................3
Part (i)................................................................................................................................................3
Part (ii)..............................................................................................................................................3
Part (iii).............................................................................................................................................3
Part (iv)..............................................................................................................................................3
Part (v)...............................................................................................................................................4
Part (vi)..............................................................................................................................................4
Part (vii)............................................................................................................................................4
Part (viii)...........................................................................................................................................5
Task B...................................................................................................................................................6
Question 1.........................................................................................................................................6
Question 2.........................................................................................................................................6
Question 3.........................................................................................................................................7
Question 4.........................................................................................................................................7
Question 5.........................................................................................................................................8
References:............................................................................................................................................9

Advanced Financial Accounting 3
Task A
Introduction:
The company we selected is PHOTON GROUP LIMITED its name changed to ENERO
GROUP in the year 2012. The company is basically involved in the providing integrated
communication and marketing services in Australia, US and UK. The company is listed in
Australian stock exchange. The company’s major services are advertising, communication
planning, events management and direct marketing.
Requirements:
Part (i)
We analysed the annual report of the company of the year 2016 and we found that the
company’s assets that has undergone impairment test are goodwill allocated to the CGU and
its trade receivables.
Part (ii).
The company conducted the impairment test by reviewing the carrying amounts of the
Goodwill and trade receivables at each reporting date. This is done to review as if there is any
indication of the impairment. If there is any such indication then the recoverable amount of
the asset is estimated. As the goodwill and other intangible assets are not amortised over the
useful life that is the only reason to do impairment testing on these assets to know as if there
is change in the carrying amount of these assets (Annual Report, 2016).
Part (iii)
The impairment expenditure recorded by the company is $ 249000. The impairment
expenditure is recorded in the income statement by the company.
Part (iv)
The assumptions used by the company for the impairment of assets are:
Discount Rate:
Task A
Introduction:
The company we selected is PHOTON GROUP LIMITED its name changed to ENERO
GROUP in the year 2012. The company is basically involved in the providing integrated
communication and marketing services in Australia, US and UK. The company is listed in
Australian stock exchange. The company’s major services are advertising, communication
planning, events management and direct marketing.
Requirements:
Part (i)
We analysed the annual report of the company of the year 2016 and we found that the
company’s assets that has undergone impairment test are goodwill allocated to the CGU and
its trade receivables.
Part (ii).
The company conducted the impairment test by reviewing the carrying amounts of the
Goodwill and trade receivables at each reporting date. This is done to review as if there is any
indication of the impairment. If there is any such indication then the recoverable amount of
the asset is estimated. As the goodwill and other intangible assets are not amortised over the
useful life that is the only reason to do impairment testing on these assets to know as if there
is change in the carrying amount of these assets (Annual Report, 2016).
Part (iii)
The impairment expenditure recorded by the company is $ 249000. The impairment
expenditure is recorded in the income statement by the company.
Part (iv)
The assumptions used by the company for the impairment of assets are:
Discount Rate:

Advanced Financial Accounting 4
The Group’s discount rates are based on the pre-tax weighted average cost of capital
(WACC).
Projected Cash Flows:
The projected cash flows are estimated on the basis of the current financial year results
adjusted for the expectations of the future trading performance. Projected cash flows can
differ from the actual cash flows (Dagwell, Wines & Ambert, 2015).
Growth rate:
The growth rate taken by the company is the compounded average growth rate of 2.4% that
has been applied to estimate the projected future cash flows of the company or CGU. This
growth rate is based on the industry growth rates and historical growth rates.
Part (v)
The CGU’s recoverable amount is based on the value in use which is calculated by using the
pre-tax cash flow projections which are based on 2017 financial budget. The cash flows are
estimated by using the growth rate of 2.40%. The cash flow projections are based on the
gross margins which were expected to be same throughout the year.
Part (vi)
The company did the impairment test and recorded the impairment loss in its income
statement. At the time of calculating the impairment loss the company contended that if the
recoverable amount of CGU will be less than the carrying amount the impairment loss will be
first allocated to the goodwill and then to any other asset of the CGU. The impairment loss
recognised on the goodwill will be transferred to the income statement directly and not to be
reversed in the subsequent financial years.
Part (vii)
The impairment loss recognised on the part of account receivables in previous years was
deducted from the amount that needs to be recorded in the balance sheet. The company also
reviews the non-financial assets other than goodwill at each reporting date for the purpose of
estimating the amount of impairment.
The Group’s discount rates are based on the pre-tax weighted average cost of capital
(WACC).
Projected Cash Flows:
The projected cash flows are estimated on the basis of the current financial year results
adjusted for the expectations of the future trading performance. Projected cash flows can
differ from the actual cash flows (Dagwell, Wines & Ambert, 2015).
Growth rate:
The growth rate taken by the company is the compounded average growth rate of 2.4% that
has been applied to estimate the projected future cash flows of the company or CGU. This
growth rate is based on the industry growth rates and historical growth rates.
Part (v)
The CGU’s recoverable amount is based on the value in use which is calculated by using the
pre-tax cash flow projections which are based on 2017 financial budget. The cash flows are
estimated by using the growth rate of 2.40%. The cash flow projections are based on the
gross margins which were expected to be same throughout the year.
Part (vi)
The company did the impairment test and recorded the impairment loss in its income
statement. At the time of calculating the impairment loss the company contended that if the
recoverable amount of CGU will be less than the carrying amount the impairment loss will be
first allocated to the goodwill and then to any other asset of the CGU. The impairment loss
recognised on the goodwill will be transferred to the income statement directly and not to be
reversed in the subsequent financial years.
Part (vii)
The impairment loss recognised on the part of account receivables in previous years was
deducted from the amount that needs to be recorded in the balance sheet. The company also
reviews the non-financial assets other than goodwill at each reporting date for the purpose of
estimating the amount of impairment.
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Advanced Financial Accounting 5
Part (viii)
Fair value measurement is the price which we receive when we sale or transfer any asset. Fair
value measurement technique is totally market based and the entity based measurements have
no role to play in it. The company’s cash forecast are based on the 5 years projected cash
flows.
Part (viii)
Fair value measurement is the price which we receive when we sale or transfer any asset. Fair
value measurement technique is totally market based and the entity based measurements have
no role to play in it. The company’s cash forecast are based on the 5 years projected cash
flows.

Advanced Financial Accounting 6
Task B
Question 1
As we see in the present case, the IASB’s chairperson contends that the lease standard that
was used before does not present the economic realty. The reason behind this is that in the
current accounting standard more than 85% of the leases are operating lease and are not being
reported in the balance sheet of the company. During the financial crises it becomes difficult
for the industries like retail industries to identify the real liabilities as in the current
accounting standard leases are recorded as an off balance sheet item (Maynard, 2017). The
companies are free to categorise its leases as operating leases and operating leases are not
represented in the balance sheet because of that investors find it difficult to compare and
contrast the economic conditions of the separate entities. This lead to faulty presentation of
the financial statements of the company which misleads the investors and affect the decision
making process. This will affect the concept of true and fair presentation of financial
statements. That is the only reason behind the chairpersons’ contention that the former lease
standards do not reflect the economic reality of the companies.
Question 2
In the old standard, the leases which are likely to be in the nature of purchase are recorded as
finance lease and finance leases are recorded in the company’s balance sheet. The leases
which are not considered as finance lease are recorded as operating lease. Operating lease
does not form part of the balance sheet of the company and are recorded as an off balance
sheet items (Robinson, Henry, Pirie and Broihahn, 2015). Operating leases forms a part of an
off balance sheet item as per the former accounting standard of lease. In this case we found
the fact that the lease liabilities which are reported off balance sheet are 66 times more than
the reported debt amount. This reason for this big difference is the reporting requirements of
the accounting standards. As per the accounting standard companies are not required to
present their operating leases in the statement of financial position and this lead to false
presentation of the financial position of the company. The information about the leases of the
company is not presented in the financial statements of the company that will impact the
decisions of the stakeholders and investors of the company. There is also a drawback attached
with the non-reporting of the lease liability as theses lease liabilities can be traded in any
Task B
Question 1
As we see in the present case, the IASB’s chairperson contends that the lease standard that
was used before does not present the economic realty. The reason behind this is that in the
current accounting standard more than 85% of the leases are operating lease and are not being
reported in the balance sheet of the company. During the financial crises it becomes difficult
for the industries like retail industries to identify the real liabilities as in the current
accounting standard leases are recorded as an off balance sheet item (Maynard, 2017). The
companies are free to categorise its leases as operating leases and operating leases are not
represented in the balance sheet because of that investors find it difficult to compare and
contrast the economic conditions of the separate entities. This lead to faulty presentation of
the financial statements of the company which misleads the investors and affect the decision
making process. This will affect the concept of true and fair presentation of financial
statements. That is the only reason behind the chairpersons’ contention that the former lease
standards do not reflect the economic reality of the companies.
Question 2
In the old standard, the leases which are likely to be in the nature of purchase are recorded as
finance lease and finance leases are recorded in the company’s balance sheet. The leases
which are not considered as finance lease are recorded as operating lease. Operating lease
does not form part of the balance sheet of the company and are recorded as an off balance
sheet items (Robinson, Henry, Pirie and Broihahn, 2015). Operating leases forms a part of an
off balance sheet item as per the former accounting standard of lease. In this case we found
the fact that the lease liabilities which are reported off balance sheet are 66 times more than
the reported debt amount. This reason for this big difference is the reporting requirements of
the accounting standards. As per the accounting standard companies are not required to
present their operating leases in the statement of financial position and this lead to false
presentation of the financial position of the company. The information about the leases of the
company is not presented in the financial statements of the company that will impact the
decisions of the stakeholders and investors of the company. There is also a drawback attached
with the non-reporting of the lease liability as theses lease liabilities can be traded in any

Advanced Financial Accounting 7
manner as and when required. The reporting of the lease as an off balance sheet item also
helps the company in keeping their debt equity ratio low.
Question 3
In the present case, the chairperson of the company argued that the ‘level playing field’
between the airlines companies is not there in respect of their reporting formats. The airlines
entities which are following the old lease standard may report the fleet as an operating lease
liability the other entities may represent it as finance lease. In the old lease standard the
operating lease liability is reported as an off balance sheet item. The competitor companies
may be considering the lease of fleet as finance lease as there is no defined criterion for the
classification of the lease (Kusano, Sakuma and Tsunogaya, 2015). Finance lease is recorded
in the financial statements of the company. The competitor company which takes the fleet on
the lease and purchases criterion will consider the lease as finance lease and finance lease is
reported in the balance sheet of the company. There are contrary things available in the
former accounting standard for the reporting of the lease as the investors who are analysing
two companies they will become confused regarding the leased assets as may be some
companies are taking finance lease and other are taking operating lease. Some are reporting
lease in the financial statements and some are reporting lease as an off balance sheet item.
There need to be harmony in the criterion to be followed by the company or the reporting
requirements of the standard s to make the presentation of financial statements comparable.
That is only reason behind the chairpersons statement that lease standard does not provide
same level of comparison between two companies.
Question 4
The new accounting stand for lease will majorly impact the airline industry, retail and
shipping sector as the leased assets are more in these sectors. The chairperson also contended
that the new accounting standard will majorly affect the listed companies and will have low
impact on the unlisted companies. The reason behind this may be the reporting requirements
between these two segments. International Accounting Standard Board (IASB) has
established a new accounting standard for the accounting of leases that is (International
Financial Reporting Standard) IFRS 16. This new accounting standard will replace the
existing IAS 17 and will be effective from 2019 (Kieso, Weygandt and Warfield, 2010). This
new accounting standard will change the reporting requirements of the lease as per this
manner as and when required. The reporting of the lease as an off balance sheet item also
helps the company in keeping their debt equity ratio low.
Question 3
In the present case, the chairperson of the company argued that the ‘level playing field’
between the airlines companies is not there in respect of their reporting formats. The airlines
entities which are following the old lease standard may report the fleet as an operating lease
liability the other entities may represent it as finance lease. In the old lease standard the
operating lease liability is reported as an off balance sheet item. The competitor companies
may be considering the lease of fleet as finance lease as there is no defined criterion for the
classification of the lease (Kusano, Sakuma and Tsunogaya, 2015). Finance lease is recorded
in the financial statements of the company. The competitor company which takes the fleet on
the lease and purchases criterion will consider the lease as finance lease and finance lease is
reported in the balance sheet of the company. There are contrary things available in the
former accounting standard for the reporting of the lease as the investors who are analysing
two companies they will become confused regarding the leased assets as may be some
companies are taking finance lease and other are taking operating lease. Some are reporting
lease in the financial statements and some are reporting lease as an off balance sheet item.
There need to be harmony in the criterion to be followed by the company or the reporting
requirements of the standard s to make the presentation of financial statements comparable.
That is only reason behind the chairpersons statement that lease standard does not provide
same level of comparison between two companies.
Question 4
The new accounting stand for lease will majorly impact the airline industry, retail and
shipping sector as the leased assets are more in these sectors. The chairperson also contended
that the new accounting standard will majorly affect the listed companies and will have low
impact on the unlisted companies. The reason behind this may be the reporting requirements
between these two segments. International Accounting Standard Board (IASB) has
established a new accounting standard for the accounting of leases that is (International
Financial Reporting Standard) IFRS 16. This new accounting standard will replace the
existing IAS 17 and will be effective from 2019 (Kieso, Weygandt and Warfield, 2010). This
new accounting standard will change the reporting requirements of the lease as per this
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Advanced Financial Accounting 8
standard the lease will be recorded in the financial statements and further the classification of
lease cannot be made in operating and finance lease. The next impact of the new accounting
standard will be on the assets and liabilities of the company and this will impact the key
financial ratios as the formulas for ratio analysis will be changed after implementing this
IFRS 1 (Buchman, Harris and Liu, 2016). The debt equity ratio of the companies may
increase after the implementation of the new IFRS.
Question 5
The implementation of new accounting standard will bring significant changes in the
accounting of lease. The companies will be able to present its financial statements in a true
and fair manner after the compliance with the new accounting standard. The investors will be
better off after the implantation of the new accounting standard as they will be able to make
comparisons between the companies without any point of confusion. The evaluation of the
financial statements will be accurate and comparable that will ease out the decision making
process (Öztürk and Serçemeli, 2016). The new format will be based on the single lease
accounting model which will remove the classification of lease as off balance sheet and on
balance sheet item. The lease reporting will be in the financial statements of the company as
an on balance sheet item which will make the financial statements comparable and present
the true and fair view of financial statements. The IFRS 16 will help in the better allocation of
the capital and will positively impact the economic growth of the company (You, 2017).
standard the lease will be recorded in the financial statements and further the classification of
lease cannot be made in operating and finance lease. The next impact of the new accounting
standard will be on the assets and liabilities of the company and this will impact the key
financial ratios as the formulas for ratio analysis will be changed after implementing this
IFRS 1 (Buchman, Harris and Liu, 2016). The debt equity ratio of the companies may
increase after the implementation of the new IFRS.
Question 5
The implementation of new accounting standard will bring significant changes in the
accounting of lease. The companies will be able to present its financial statements in a true
and fair manner after the compliance with the new accounting standard. The investors will be
better off after the implantation of the new accounting standard as they will be able to make
comparisons between the companies without any point of confusion. The evaluation of the
financial statements will be accurate and comparable that will ease out the decision making
process (Öztürk and Serçemeli, 2016). The new format will be based on the single lease
accounting model which will remove the classification of lease as off balance sheet and on
balance sheet item. The lease reporting will be in the financial statements of the company as
an on balance sheet item which will make the financial statements comparable and present
the true and fair view of financial statements. The IFRS 16 will help in the better allocation of
the capital and will positively impact the economic growth of the company (You, 2017).

Advanced Financial Accounting 9
References:
Annual Report, 2016. Enero Group Ltd, Accessed on 03-02-2018, from <
http://www.enero.com/shareholder-centre/annual-reports>.
Buchman, T., Harris, P. and Liu, M., 2016. GAAP vs. IFRS Treatment of Leases and the
Impact on Financial Ratios.
Dagwell, R., Wines, G. & Ambert, C, 2015. Corporate Accounting in Australia, Pearson
Higher education.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS edition
(Vol. 2). John Wiley & Sons.
Kusano, M., Sakuma, Y. and Tsunogaya, N., 2015. Economic impacts of capitalization of
operating leases: Evidence from Japan. CORPORATE OWNERSHIP & CONTROL, p.838.
Maynard, J., 2017. Financial Accounting, Reporting, and Analysis. Oxford University Press.
Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard" IFRS 16 Leases" on
Statement of Financial Position and Key Ratios: A Case Study on an Airline Company in
Turkey. Business and Economics Research Journal, 7(4), p.143.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
You, J., 2017. The Impact of IFRS 16 Lease on Financial Statement of Airline Companies
(Doctoral dissertation, Auckland University of Technology).
References:
Annual Report, 2016. Enero Group Ltd, Accessed on 03-02-2018, from <
http://www.enero.com/shareholder-centre/annual-reports>.
Buchman, T., Harris, P. and Liu, M., 2016. GAAP vs. IFRS Treatment of Leases and the
Impact on Financial Ratios.
Dagwell, R., Wines, G. & Ambert, C, 2015. Corporate Accounting in Australia, Pearson
Higher education.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS edition
(Vol. 2). John Wiley & Sons.
Kusano, M., Sakuma, Y. and Tsunogaya, N., 2015. Economic impacts of capitalization of
operating leases: Evidence from Japan. CORPORATE OWNERSHIP & CONTROL, p.838.
Maynard, J., 2017. Financial Accounting, Reporting, and Analysis. Oxford University Press.
Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard" IFRS 16 Leases" on
Statement of Financial Position and Key Ratios: A Case Study on an Airline Company in
Turkey. Business and Economics Research Journal, 7(4), p.143.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
You, J., 2017. The Impact of IFRS 16 Lease on Financial Statement of Airline Companies
(Doctoral dissertation, Auckland University of Technology).
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