Integrated Accounting Projects (ACC6040) Literature Review

This report presents a comprehensive literature review on the topic of accounting for leases, focusing on the transition from AASB 117 to AASB 16. The review analyzes three journal articles, exploring the impact of the new standard on financial reporting, particularly in sectors heavily reliant on leasing, such as aviation and telecommunications. The articles discuss the limitations of AASB 117, the implications of including operating leases on balance sheets, and the challenges faced by companies in implementing AASB 16. The analysis compares the two standards, highlighting key differences in asset classification and lease recognition. The review identifies significant research gaps related to the impact of AASB 16 on financial reporting quality and the lack of comprehensive studies differentiating between the two standards, thereby providing a foundation for future research in this area.

Running head: INTEGRATED ACCOUNTING PROJECTS
Integrated Accounting Projects
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction..................................................................................................................................2
Literature Review.........................................................................................................................2
Additional guiding literature........................................................................................................6
Comparison of Articles................................................................................................................6
Research Gap...............................................................................................................................7
Conclusion...................................................................................................................................8
Bibliography.................................................................................................................................9

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Introduction
The overall topic on which literature review is to be conducted in the given scenario is
‘Accounting for Leases’. This topic has been chosen due to its importance in the modern day
businesses and the wide variety of accounting treatments available in this regard. The area
dealing with the manner in which leases should be accounted for by the businesses is known as
Lease Accounting. A Lease can be defined as a contract which allows one party to use an asset
belonging to another for a certain period of time in exchange of monetary consideration. The
lease agreements may be taken either for a fixed asset or for a real estate and these may be
classified as either an operating lease or a capital lease. This was the manner of accounting
previously when the accounting for leases was guided by AASB 117 in Australia as suggested by
AASB. However, this has been changed with the introduction of AASB 16 in 2016. It has been
revolutionary in the manner of operation as it changes the accounting for leases in the balance
sheet and the Income Statement of the company. The major change which is brought about by
the introduction of the AASB 16 is related to the Accounting for Operating Leases which are off-
balance sheet. The AASB 16 is mostly done on the basis of IFRS 16 with hardly any major
changes occurring between their functionalities. The purpose of analysing the literature is to
identify the changes which have been brought to the accounting for leases in the modern day
accounting environment and study their impact on the businesses. The three aspects on which
literature review has been conducted are arranged in a chronological order to understand the
changes in an organised manner.
Literature Review
The first article which was selected was related to the study of the financial developments
of a desalination plant in the State of Victoria in Australia. The purpose of selecting this article is

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to highlight some of the limitations which existed in the AASB 117 which were the cause for its
removal by the businesses. The analysis is related to the mannwas toer in which accounting
treatment is used in valuing this particular infrastructure asset. The authors suggest that the
accounting policies applied in the valuation of this asset are not consistent with the conventional
accounting theory or the Generally Accepted Accounting principles followed by the businesses.
The balance sheet and the reporting practices of the entity are particularly inconsistent in the area
of Lease Accounting. The motivation of the PPPs entered into by the organisation was to gain off
the balance sheet financing for projects by categorising the assets and liabilities of the business
in a selected manner. The lease liability payable under the project deed is recognised in the
financial statements of the entity. A sub-leasing agreement with Melbourne Water is also
recognised as a finance lease in the books of accounts. In the cost model followed by the entity,
the amount of financial lease is recognised along with the operation and maintenance and a
capital expenditure along with that of GST charged on the entity. This is then used in charging
higher prices by the entity from the consumers who have to bear the burden of the inflated costs.
There is an obligation on the part of the government to make the necessary payments to the
AquaSure water consortium as long as the plant is maintained. These payments also include the
lease payments made by the entity.
The findings of these articles suggest the accounting for leases under AASB 117 can be
used in manipulating the books of accounts to the benefit of the entity and hence should be
replaced with a better accounting standard. This accounting standard should be useful in
recognising the different issues related to a lease without manipulating the books of accounts.
The second article that has been chosen for a comprehensive review of the findings is
related to the potential implications of the inclusion of operating losses in the Balance Sheet of a

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company. The main purpose of this paper was to examine the impact of the AASB 16 on the
aviation and telecommunication sectors where leasing is one of the most commonly methods.
Especially in case of operations of the firms. In order to do the same, the researchers used the
publicly available data related to the financial reports of the business for the years 2015 and
2016. The main task undertaken in this research was to calculate the key financial ratios which
would change due to the adoption of AASB 16. It also calculated the extent to which the
inclusion of this accounting standard would have an impact on the key financial ratios of the
businesses. In this regard, the findings of the paper suggest that the main ratios which would be
impacted significantly by AASB 16 include the Return on Assets and the Debt to Equity ratio.
These have the most visible impact in the financial statements of the companies. The other
significant area that was examined by this paper included the potential impact of the Altman Z
score on the companies. This is because the Altman Z score can easily impact the perception of
the liquidity of the companies examined by the paper.
The main findings of the first paper suggests that the additional leased items, previously
classified as operating lease items have a significant impact on the return on total assets and the
debt to equity ratio of a company. The percentage increase of the total assets and the total
liabilities was identified to be lower than 10% materiality under the threshold of AASB 1031
Materiality. The impact of the Altman Z score was also not very significant as none of the
companies transitioned to a different z score due to the implementation of AASB 16 as a part of
their financial statements.

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The final article that was selected along these lines to conduct a comprehensive literature
review of the available information is related to a project based on identifying the impact of the
introduction of AASB 16. It examines the extent to which companies have made themselves
ready in using AASB 16 as a part of their reporting practices. In order to study the same, some of
the aspects which have been analysed are based on four dimensions. The first aspect is the
implementation progress and the structure of the project in which this accounting standard is
applied more. The other aspects identified in this regard include the challenges faced by the
companies in the implementation of AASB 116 and whether the companies are perceiving the
new benefits as being realised by the business or not. Other minor areas studied in this paper also
include the study of the related impacts and issues of the introduction of the standards. It allows
the users of the report to benchmark their programs against the programs of the peers and
improve in areas where there is a possibility to do so. The survey conducted by the researchers in
this regard suggests that a majority of the companies are in the process of implementing the
accounting standards. They have either not fully implemented the standards due to the lack of
understanding or are still in the process of implementing the standards as a part of the financial
reporting practices followed by them. The observations of these reports are concerning because
the guidelines of ASIC suggested that they expected the entities to start the implementation of
AASB 16 by the end of 30 June 2019. Hence, this paper suggests that the impact of the
implementation of AASB 16 cannot be calculated reliably because of the lack of sufficient
implementation by a majority of the businesses operating in the country. The main challenges
faced by the entities which prevent the implementation of the comprehensive adoption of the
standards in the business include data collection and system implementation. Another significant
matter which is being missed by the firms, improved management of the business is also

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highlighted by the research. The requirements of AASB 16 enable the firms to enhance their data
systems while also improving the overall quality of the firm.
Additional guiding literature
The comparison of the articles primarily issues one concern in which further critical
analysis is required. In order to do so, the main issues underlying these articles were further
researched to obtain a comprehensive understanding of the situation. It is related to the
differences in the accounting policies brought about by the implementation of AASB 16.
Another issue to consider in this regard is to suggest how AASB 16 is different from AASB 117.
One of the significant differences between both the policies is related to the classification of the
assets. While AASB 117 used to classify leases of an entity as either operating leases or financial
leases, AASB 16 completely removes the concept of operating leases. The standard suggests that
all leases should be classified as financial leases. The key objective of AASB 16 is to recognise
all leases as a form of a right to use an asset and capitalise them as a part of the balance sheet
prepared by the entity. It also suggests that the lease payments should also be recognised as a
liability and any future obligations related to its payment should be recognised in the financial
statements of the entity. The literature available suggests that no substantial changes were made
to lessor model of the AASB 117 except for an enhanced disclosure on the part of the lessors
related to the entity. The leveraged lease model was also removed from AASB 16 while the
AASB 117 allowed the netting of the non-resources related debt. The lessor is also required to
make additional disclosures related to the risk management activities undertaken by them.
Comparison of Articles
The comparison of the three selected articles suggests some similarities and provides a
wide scope for further analysis of the scenario. The first article suggests that AASB 117 was not

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completely consistent in the manner in which it dealt with the requirements of the accounting for
leases. Hence, there was a scope for the preparers of the financial statements to manipulate the
financial statements by not following the necessary disclosure requirements in the financial
statements. Even though AASB 16 has been brought up to modify this situation by improving the
disclosure requirements of the lessor, its impact on the accounting for leases is not yet
completely known. One of the impacts of the usage of AASB 16 as a part of the financial
statements is that it will have a significant impact on the key financial ratios of the entities
belonging to industries with high leases. However, the reasons for this impact or the manner in
which it would impact the situation is also not particularly clear. The final article suggests that
the further studies on the impact of AASB 16 on the financial statements of the entity or their
reporting quality is also not known. This is because of the lack of implementation of the
disclosure requirements as suggested by the AASB.
Research Gap
The analysis of the available literature provides a significant gap which needs to be
fulfilled with specific research related to lease accounting. Primarily, there are no quality studies
which clearly differentiate between AASB 117 and AASB 16 and their relevance in the field of
accounting for leases. The other gap is related to the lack of clarity about the impact which the
introduction of AASB 16 has had on the financial reporting quality of the firms. However, the
lack of availability of data is also a reason for not being able to provide further research in this
regard. Hence, as more firms start adopting AASB 16 guidelines as a part of their reporting
framework, it will become much easier to study the impact. However, even in the present
scenario, the available data can be used to provide a more generalised impact of the adoption of
AASB 16 on the quality of the financial statements prepared by the entity.

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Conclusion
On an overall basis, the above findings can be summarised in a concise manner. The
accounting for leases is one of the areas in which there is a significant dearth of research and a
lack of availability of quality literature. This is because of the complexity of the topic and the
lack of quality supporting literature to better explain it to the users of the financial statements.
Another significant issue is related to the changes brought about by the changes in the
accounting framework. There are no quality literature to explain how AASB 16 differs from
AASB 117 in a practical manner. There is also a need to explain how AASB 16 improves the
overall quality of the research conducted by individuals and why more firms should adopt it as a
part of their reporting requirements. The reluctance of the firms in implementing AASB
framework needs to be thoroughly analysed in changing the requirements of the future
accounting standards. Research related to this area is highly useful for a wide variety of
stakeholders. The firms can understand the benefits of improving their reporting quality through
the implementation of this framework. Future policy makers and governing bodies can also
understand how the policies framed by them should be improved to make their adoption
increasingly voluntary. The future researchers will also clearly understand the differences
between AASB 117 and AASB 16 and apply the same in analysing a firm’s performance over a
period of time.

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Bibliography
Shah, F., Davern, M., Hanlon, D. and Gyles, N., 2019.
Implementing AASB 16 Leases: Are Preparers Ready?.Tan‐Kantor, A., Abbott, M. and Jubb, C.,
2017.
Accounting Choice and Theory in Crisis: The Case of the Victorian Desalination Plant.
Australian Accounting Review, 27(3), pp.273-284.
Treasury.nsw.gov.au. (2020). [online] Available at:
https://www.treasury.nsw.gov.au/sites/default/files/2017-04/Guidance%20for%20AASB
%2016%20Leases%20-%20New%20Lease%20Standards.pdf [Accessed 29 Mar. 2020].
KPMG. (2020). AASB 16: Leases. [online] Available at:
https://home.kpmg/au/en/home/insights/2017/04/aasb-16-leases-standard.html [Accessed 29
Mar. 2020].