Accounting Standard for Leases: Impact of AASB 16 on Organizations

This report provides a comprehensive overview of accounting standards for leases, focusing on the transition from the old standard (AASB 117) to the new standard (AASB 16). The report begins with an evaluation of the drawbacks of the old standard, which allowed for different accounting treatments for finance and operating leases, leading to complexities and potential misrepresentation of financial information. It then explores the rationale behind the changes, highlighting the need to remove complexities, improve comparability, and prevent tax avoidance. The report details the changes incorporated in AASB 16, which aligns with IFRS 16, and the impact of these changes on organizations, including the need for training and adjustments in financial reporting. Furthermore, the report discusses the relationship between positive accounting theory and the practice of classifying leases as operating leases to reduce tax liabilities. Finally, it examines the effects of implementing AASB 16 on the leasing market and the key disclosures organizations must make regarding their lease accounting practices. The report concludes by summarizing the key changes and their implications for financial reporting and decision-making.

Accounting Theory and
Issues

ABSTRACT
This report include the evaluation of old accounting theory and implementation of new
accounting theory in the organisation which provide the clarification of various treatment
regarding operating and financial leases. Their are various regulatory bodies which guide the
accounting standard such as IAS, AASB 117 and AASB 16.

Table of Contents
ABSTRACT ....................................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Evaluation of old accounting standard for lease......................................................................1
2. Why changes are necessary.....................................................................................................2
3. What changes are incorporated with the new accounting standard for leases AASB 16........3
4. Explain the impact of changes in the Accounting Standard on the organisation.....................4
5. Relationship between positive accounting theory and manager's behaviour of dividing leases
as operating leases........................................................................................................................5
6. Implementation of IFRS 16 to improve compatibility among organizations where lease
assets and companies borrow to buy assets.................................................................................6
7. Effect on leasing market after implementing AASB 16..........................................................6
8. Key disclosures are made by various organization on its accounting for lease.......................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Accounting theory is the set of various assumption, methodology and framework which
is applied for the preparation of financial report. This theory analyse the historical fundamentals
of accounting as well as applied these practices for the change and it include the regulatory
framework which regulate financial statement reporting (Asare and Wright, 2012). This report
include the various topic such as critical evaluation of old accounting standard for lease and what
are the new changes in the accounting standard for lease. It include the significance level of lease
financing which affect the change in accounting standard and it classified most of the lease
contract as an operating issues. In addition, it also include the IASB and it's implementation as
well as explanation of AASB 16 and it's effect on leasing market. In addition, it include the key
disclosure of those company who implement the accounting for the lease and practice of
provision from AASB 16 to AASB 117.
MAIN BODY
1. Evaluation of old accounting standard for lease
Australian Accounting Standard Board 117 (AASB 117) has main objectives is to
disclose the operating or financial leases. This accounting standard used by the every
organisation to prepare their financial reports with the help of various transactions. These
financial reports prepared under the corporate act for the general purpose. Some of the area are
excluded from it such as:
 For those leases entity which have chances to explore and other corporation which use
natural gas, oil, minerals and other related resources which is non- regenerative.
 Licensing agreement of various items such as patent, copyrights, manuscript and video
recording are excluded from this accounting standard.
Below mentions points not consider in this accounting standard:
 Any property for the further investment consider under operating lease by a lessor.
 It also include the biological assets which comes under operation lease by lessors.
 Those assets which comes under the biological assets also consider as financial leases.
 Property help by the lessor is considered as property for investment for the accountant.
Drawback:
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In the old accounting standard, the biggest drawback is that each different type of leases
have different accounting treatment which include finance or operating leases. According to
Australian Accounting Standard Board 117, each type of lease have different treatment which
generate complication at the time of implementation. In the new standard of accounting,
organisation have to mentioned the operating as well as financial lease as an expenditure of the
company where they have to include in the profit and loss account. Biggest drawback is that
lease liabilities will be shown in the owner's book. But hide for the user of financial statement
who become a potential investor for the organisation. New accounting standard IFRS 16 remove
the discrepancy and include the all lease in the balance sheet which provide the actual position of
the business. On the other hand, capital leases will not charged in the income statement which
also creates the Confusion and complication for the organisation. New accounting standard
provide the guidelines regarding different type of leases, which is not considered in the balance
sheet but included in the income statement. Because these leases treated as expenses rather then
company's assets (Bohušová , Svoboda and Nerudová, 2012).
2. Why changes are necessary
Changes are required in the accounting standard to remove the complexity or
complication at the time of treating lease or try to off set the different among the balance sheet.
According to IAS 17, at the time of preparing their financial report or statement, accountant have
to classify the leases between operating of finance. If in case, operating leases reduce then it will
not recorded in the balance sheet rather then it considered as expenses and recorded in the
income statements of leases entity. But, there are some of operating leases which is still recorded
in the liability side of leases balance sheet but hide from those balance sheet which is available
for the financial users. It is those users who analyse the financial statement and then measure that
weather it is profit making company or not. In the financial statement, some of the discloser is
compulsory in the financial report but most of the time it happen that, auditors miss this point to
read which is written in the notes of financial statements. For the better implementation of
accounting standard, financial body introduce new accounting standard which provide
effectiveness and efficiency in the financial statements (Gipper, Lombardi and Skinner, 2013).
In the earlier days, various problems occur in the accounting standards in respect of
leases because most of the organisation misrepresent the information in the financial statement
where they consider the leases. Due to considering leases in their accounts, company have to pay
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less tax because operating leases included in the profit & loss account as a expenses of the
company. Due to these issues, it become necessary to change the guidelines in the old accounting
standard so it help the organisation to off set their balance in the balance sheet. New accounting
standard provide the clear guidelines which include the company's leases and it will be recorded
in the balance sheet of company's leases (Henderson and et.al., 2015). In the old accounting
standard have various loopholes because organisation save their tax through including leases in
the income statement as a tax. But now it will not happen because new accounting standard
provide the clear instruction.
3. What changes are incorporated with the new accounting standard for leases AASB 16
Australian Accounting Standards Board 16 (AASB 16) in compliance with IFRS 16
where they develop a new meaning of lease. Which is almost same from the older one and it will
be describe in International Accounting Standard 17 (IAS 17). New accounting standard
regarding lease include the detailed information which include the various guidelines, instruction
or principle which organisation have to follow.
This standard also provide the clear instruction regarding contracts which is prepared for
the various purpose. In the old accounting standard, operating leases or service contract treated in
the same way through including in the profit and loss account. This treatment will create
confusion or become complicated for the organisation. So, due to this reason changes are
required and it become necessary to change in the accounting standard and introduce new one.
According to new accounting standard, it is clearly stated that contract of operating leases will be
changed because accounting for leases is very important for the organisation. So leases under the
IFRS 16 will be compliance with other standards which effectively applied in the entity.
For example: Company have to pay rent of warehouses for the storage of their goods.
They entered for the three years of contract where owner offer the two options and it will be as
follow:
 First option is that, occupied area for the XY corporation always be the property of owner
where XY company is the actual user of warehouse and area will be still occupied for the
storage (Masruki and Shafii, 2013).
 Another option is that few units of the XY corporation will be occupied to the owner and
then the place will be assign to the company for the use until their contract will finished.
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Australian Accounting Standard Board16 is important to identify that contract include the
leases or not because it help the organisation to identify assets in the contract or if they identified
then it will become a leases. According to above scenario, there are two cases identify.
In first case, contract is not determined as an assets. Because owner of the warehouse
provide a place for storing and they can change it well because XY corporation take few space.
So it is considered as a rental payment which is mentioned in the income statement of the
company.
In the second case, it is identifies as contract because assets can be determined. Company
reserve the place for the certain period of time and it will not changed until contract is working.
In this case company will consider this leases into accounts and consider it as assets or liability
and then mention in the balance sheet (Ngwakwe, 2012).
4. Explain the impact of changes in the Accounting Standard on the organisation
Change in the accounting standard affect most of the organisation and it's financial
statement at the time of implementing these standards. These changes include the removal of
difference between the operating or finance lease which is not included in the balance sheet
according to the old accounting standard. But, as per new standards, company have to include
lease in the balance sheet. As per current accounting standard regarding lease, states that any
obligation of the organisation will nor consider in the balance sheet even if company already
committed to pay . Changes also include the right use of assets or liability of lease and it will be
adjusted in the organisational balance sheet.
With the help of new accounting standard, organisation can easily understand the
instruction or guidelines which help the internal people to execute in the reality without any
complexity. Company prepare financial statement which provide the necessary information
which help the various investors who take important decision on the basis of these reports. For
example: In the Virgin Australia, old accounting standard affect the company because after
introducing new accoutring standard affect the company where employees are not use to the new
standards so manger of the company have to provide proper knowledge and training. Investors
have old information regarding their financial statement which create the mess. So organisation
have to implement as fast they can apply and then develop required financial statement.
Changes in the standards will provident the considerable level of reporting where commercial or
financial risk increase the complexity and generate the hidden issues which occur after executing
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new accounting standards for lease (Okpala, 2012). Lease liability will be divided into two parts
such as current or non current liability where right of using assets will be consider in the balance
sheet under the head of non current assets. Uneven balance will create issue for the working
capital where current liability will be pay off through funding with current assets. After
implementing IFRS 16 Virgin Australia face the various issues which affect the profitability of
the organisation.
5. Relationship between positive accounting theory and manager's behaviour of dividing leases
as operating leases
Most of the organisation classified their leases into operating leases because it is not
included in the balance sheet of the organisation. As per the old accounting standard AASB 117,
operating lease are not included in the balance sheet but the treatment of this head will be done
as additional expenses and included in the income statements. Most of the organisation's
manager will done this activity, because by adding operating lease in the financial accounts will
reduce the profit because it is measured as expenses of the business. When profit of the company
is low then business has to pay lower tax. So organisation will do this activity for the saving of
tax or reduce the tax liability. If organisation exclude the operating lease from income statement
then it will increase the profit margin which automatically increase the tax liability of the
business. So manager will done these functions which affect the organisational profitability and
reduce the tax liability (Oulasvirta, 2014).
Positive Accounting Theory: This theory concentrated on prediction such as select any
accounting policies which help the business to prepare financial report and another one is how
organisation implement the changes of accounting standard. This help the business to reconcile
the efficiency of market with economic consequences. So basically, this theory is about to
predict the accounting policy which is most suitable for the operational functions. It also required
the reaction that how organisation going to implement it as per new accounting standards.
Manager's behaviour it related to the positive accounting theory, because it will take their
decision on some predicted evidence. Manager of the company done various actions which
include the several loopholes and it affect the business profitability where profit will reduce due
to adding operating lease in the accounts and it will automatically reduce the tax liability of the
company. So this is how manager's behaviours of positive accounting theory are interlinked and
classify the leases.
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6. Implementation of IFRS 16 to improve compatibility among organizations where lease assets
and companies borrow to buy assets
According to IFRS 16, financial statement improve the significance level where
companies will done these actions such as :
 organisation identify their total assets and liability including all leases.
 Determine each lease liability as well as each assets lease (Pacter , 2014).
 Identify their rights which acquire the liability which occur by the organisation through
lease.
It resulted, different operating decision reflect the financial statement of various
organisation. When lease considerable as similar to the economic borrowings where company
buy an assets. In this case, reported amount as per IFRS 16 is similar to that amount which
borrow to buy that particular assets. If company consider the lease then economically lease will
not similar to the borrowings to buy products. After analysing all the cases, company will take
their decisions which is beneficial for the organisation. After implementing new accounting
standard companies not able to misrepresent their financial information and they have to prepare
their accounts according to new guideline which shows the actual position of the company.
For example: Airline industry going to take new craft on lease for 15 years so amount
required from borrowing is similar to that amount which required for buying new aircraft. So
company have to take decision that, weather they take Aircraft on lease or buy a new one. Both
amount is economically same then organisation have to report their assets & liability and take
Aircraft on lease. If it is not same then company have to borrow funds to but an Aircraft
(Richardson, Taylor and Lanis, 2013). company analyse that, if they have to bear more money to
buy an Aircraft rather then on lease. Then company take Aircraft on lease because economically
value of the Aircraft on lease is lower then buying a new one.
7. Effect on leasing market after implementing AASB 16
Implementation of AASB16 affect the leasing market where organisation decided to buy
more assets which help further help the business to take less assets on lease. After implementing,
company try to increase their assets in order to reduce the lease assets because company have to
show in the balance sheet. So basically, organisation have to show their assets and liablity lease
either it is operating or finance lease.
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Older accounting standard, AASB 117 use to record their operating leases in financial
statement such as profit and loss accounts. This action will reduce the profit margin because
these leases will be considered as expenses which reduce net profit and it automatically reduce
the obligation of company to pay lower tax. But after implementing new accounting standard ,
organisation have to report operating lease or finance lease in their balance sheet. Companies
think that, purchase of new assets is more economically rather then take assets on lease ( Tarca,
Morris and Moy, 2013). Because if organisation but new asset it will be considered as expense of
the company which can claim to be deducted under the section of procurement of heavy assets.
In result, company can sell their assets in the future to pay their tax liability when demand is
fulfil by those assets.
8. Key disclosures are made by various organization on its accounting for lease
As per annual report of Virgin Australia, it has been analyse that old accounting standard
AASB 117 is replaced with new accounting standard AASB 16. This organisation assumed that,
company's risk and ownership of rewards will be divided into various finances where ti will be
measured through assets or liability which provide the actual position of the business (Annual
report of Virgin Australia, 2018). Along with this, other leases will be classified in the operating
lease where cost will be measure of 20 months lease. Company have right to use lease assets
which is depreciated as per the new accounting standard AASB 16 under the head of plant &
machinery.
Change in the accounting standard significantly affect the various factors of Virgin
Australia organisation such as operational system, financial matrix, control over financial
statement etc. As per profit and loss account of the company, operating lease cost is $389 which
is listed in the annual report. In the cash flow also, $5.7 is the operating lease of re-financing of
Aircraft. In addition, rental lease were $518.3 which include air crafting operating lease and it is
about $389 and other leases is $129.3. In the annual report of the Virgin Australia, $0.2 recorded
for the amortisation of deferred loss on sale and lease back assets (Xu and et.al., 2013).
CONCLUSION
From the above discussion, it has been concluded that old accounting standard is more
complicated or complex which create an issue in the organisation. So implementation of new
accounting standard will help the business to resolve their issues. It is generally related to the
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operating or financial lease. AASB 16 provide various guidelines or clear instruction regarding
lease which is considered as an expenses or include in the income statement or not. In addition,
positive accounting theory done various prediction regarding implementation of accounting
policies. Along with this, manager's behaviours also affect the organisation because they
misrepresent the information for the benefit of the organisation. To reduce the complexity in the
accounting standard, new accounting standard will introduce which provide the clear guidelines
or instruction.
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REFERENCES
Boos & journals
Asare, S. K. and Wright, A. M., 2012. Investors', auditors', and lenders' understanding of the
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Bohušová, H., Svoboda, P. and Nerudová, D., 2012. Biological assets reporting: Is the increase
in value caused by the biological transformation revenue?. Agricultural Economics.
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Gipper, B., Lombardi, B. J. and Skinner, D. J., 2013. The politics of accounting standard-setting:
A review of empirical research. Australian Journal of Management. 38(3). pp.523-551.
Henderson, S., and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
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accountability. Middle-East Journal of Scientific Research. 13(13). pp.1-6.
Ngwakwe, C. C., 2012. Rethinking the accounting stance on sustainable
development. Sustainable Development. 20(1). pp.28-41.
Okpala, K. E., 2012. Adoption of IFRS and financial statements effects: The perceived
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Oulasvirta, L., 2014. The reluctance of a developed country to choose International Public Sector
Accounting Standards of the IFAC. A critical case study. Critical Perspectives on
Accounting. 25(3). pp.272-285.
Pacter, P., 2014. IFRS as global standards: A pocket guide. London: IFRS Foundation.
Richardson, G., Taylor, G. and Lanis, R., 2013. The impact of board of director oversight
characteristics on corporate tax aggressiveness: An empirical analysis. Journal of
Accounting and Public Policy. 32(3). pp.68-88.
Tarca, A., Morris, R. D. and Moy, M., 2013. An Investigation of the Relationship between Use
of International Accounting Standards and Source of Company Finance in G
ermany. Abacus. 49(1). pp.74-98.
Xu, Y., and et.al., 2013. Responses by Australian auditors to the global financial
crisis. Accounting & Finance. 53(1). pp.301-338.
Online
Annual report of Virgin Australia. 2018. [Online]. Available through:
<https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/
webcontent/~edisp/fy18-annual-report.pdf>
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