AASB 16 Leases: Analyzing the Financial Impacts on Myer Ltd (MYR)

This report examines the impact of AASB 16 Leases on Myer Ltd's financial reporting, comparing current accounting policies under AASB 117 with proposed changes under AASB 16. It highlights the shift to a single lessee accounting model, requiring lessees to recognize assets and liabilities for lease...Read More

Accounting standards and regulations

EXECUTIVE SUMMARY
The present study shows that AASB 16 Leases introduces a single lessee accounting model in
which a lessee needs to realize all assets and liabilities means for each lessee with a time of
the period of over months, unless and until there is a low value of the underlying asset.
Further, a lessee must realize the right of using assets stating its right to making use of an
underlying leased asset with a lease liability stating its related obligations to make lease
payments. Proposed changes result in the better presentation of accounting information, but it
needs companies to make several changes as per proposed standard which attracts various
economic consequences. Study further shows that company had modified their accounting
for leases recognition by considering the provisions of AASB 117. Further, appropriate
disclosures has been provided regarding the changes in accounting provisions and estimates
by the company.

Part A
Summary of the current accounting policies related to the AASB117 leases of premises
As per the AASB 17, several of these lease activities have been classified as operating leases
and finance lease. Operating leases needs to be recorded at costs on a regular basis till the
contractual period of the lease expires in the income statement, and moreover, no effect has
been provided in the balance sheet (Morris, 2017).
This Standard aims to prescribe for lessees as well as for lessors, the suitable accounting
disclosures and protocols are to be applicable in relation to the leases. This standard is
applicable to the each business entity that is needed to maintain the financial reports as per
the Part 2M.3 of the Corporations Act i.e., the reporting business entity, and the common
purpose financial statement of every reporting business entity and financial statement that are
acquired to be common financial statements (Barone, Birt and Moya, 2014). The AASB 117
needs a lease to be categorized as operating or financial leases. Further, the amendments
made to the AASB 117 taking place from the AASB 2009-5 needs business entities to re-
consider the categorization of land components of all the current leases, and consider the new
land leases to identify if or if not they are in the operating or finance lease nature.
Part B
Summary of the Proposed accounting policies related to the AASB116leases of premises
The Australian Accounting Standards Board (AASB) expands issue and upholds the
Accounting Standards of Australia. Moreover, it includes interpretations.
AASB 16 Leases that is very efficient for an accounting of leases of premises which is
applicable on or after 1 January 2019 (i.e. 31 December 2019 or 30 June 2020 year ends).
Introduction of this standard will modify the accounting method and needs of the mainstream
of leases supposed by lessees and the manner to be mentioned on the balance sheet records
(Barone, Birt and Moya, 2014). Lessor accounting is considerably unaffected, and lessors
mostly carry on categorizing their leases as functioning or economics.
AASB 16 established a solo lease accounting technique and need a lessee to identify assets
and liabilities for all leases for the period of more than 12 months, except the fundamental
asset is of low value (Wong and Joshi, 2015). A lessee is obligatory to know a right-of-use
asset by expressing its right to utilize the original leased asset and a lease liability
demonstrating its compulsion to construct lease expenses.

In the proposed method, Direct financing leases in which lessors categorized the lease as a
direct financingLease, the lessor should identify the value of premise at the commencement
of the lease term (Barone, Birt and Moya, 2014). Value of an asset (lease receivable) is
determined at an amount equivalent to the cumulative of the present worth of the minimum
lease expenditures and the present value of some-guaranteed outstanding value foreseeable to
accumulate to the advantage of the lessor at the end of the Lease period.
Part C
Impact of changes
This amendment has made considerable changes in the requirement of lessee accounting and
less modification in terms of lessor accounting. Changes held in the lease accounting standard
have a wide-reaching effect on the process of lessees business, system and controls. Further,
the lessees will need a higher amount of data across the leases than before given on the
balance sheet accounting for most of the leases (Joubert, Garvie and Parle, 2017). Companies
will be required a cross-functional aspect to implementation, not mere accounting.
By considering the annual report of the company, provisions of AASB 117 has already
complied with the company with the application of standards the financial statement of the
company has been affected in the following manner; the company announced the decision to
not to renew the leases Hornsby, Belconnen and Colonnades (Annual Report of Myer, 2017).
The Group has been able to realize a $9.1 million arduous lease provision regarding the
additional surplus space regarding the space determined. This provision expense is on a
partial basis balanced by the write-back in regards to space. In addition, the impairment
related to the assets linked with store closures, distribution centres and office difficult lease
provision. Further, the lease rights are done amortization over the lease term along with any
renewal options rationally to be used during acquisition of the lease rights (Xu, Davidson and
Cheong, 2017). As per the AASB 117 Lease, the full rentals on these leases are expenditure
on the lease term in the basis of straight line. This provision shows the variation among the
future-oriented payments as per these leases and the full future expenditures (Barone, Birt
and Moya, 2014). On the basis of this provision related for support office onerous lease
realized at the time of period, a part of this provision is written-off to show the reunited future
expenditure having the expectancy on the left lease term. Various lease contracts meant for
stores inclusive of the cash contributions given by the lessor related to the fit-outs and known
to as a lease contribution (Annual Report of Myer, 2017). The AASB 16 Lessees was

introduced in the year 2016, by the AASB, this standard alleviates the categorization among
operating as well as finance leases and releases a singular accounting model (Chambers,
Dooley and Finger, 2015). The reformed model needs the leased asset recognition, and its
related lease liability, held for each and every lease that have an aspect of higher than 12
months and the single realization of the depreciation charge held on the asset which is leased
from the interest expenditure on the leasing liability. Thus, the adoption of AASB 16 is likely
to have a materialistic effect on the consolidated financial statement of the Group at the
transition in upcoming years to the degree that leases presently categorized as operating
leases will require to be taken on the balance sheet (Wong, Wong and Jeter, 2016).
.Part D
Potential economic consequences of change in accounting standard
Costs and benefits related to the economic can be considered from the perceptions of the
statement users and preparers. As per the proposed standard, leases capitalization has
considerable effects on the reported numbers of accounting; it will impact the contracts amid
managers as well as stakeholders (Dakis, 2016). Further, this assumption is believed by the
aspect that the lease capitalization improvises the chances of infringing the debt covenants.
Further, it will require changes in disclosures method for lease accounting by the companies
on which accounting standard of the lease is applicable. Further, the same is to be reflected in
the financial statements of the company supported by appropriate disclosures.

REFERENCES
Annual Report of Myer, 2017. [pdf]. Available from
<http://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA
/file/Myer_Annual_Report_2017.pdf>. [Accessed on 18 September 2018].
Barone, E., Birt, J. and Moya, S., 2014. Lease accounting: A review of recent
literature. Accounting in Europe, 11(1), pp.35-54.
Chambers, D., Dooley, J. and Finger, C.A., 2015. Preparing for the looming changes in lease
accounting. The CPA Journal, 85(1), p.38.
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance
Directions, 68(2), p.99.
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance
Sheet. Journal of New Business Ideas & Trends, 15(2).
Morris, R.D., 2017. Discussion of: The Phoenix Rises: The Australian Accounting Standards
Board and IFRS Adoption. Journal of International Accounting Research, 16(2), pp.155-157.
Wong, J., Wong, N. and Jeter, D.C., 2016. The Economics of Accounting for Property
Leases. Accounting Horizons, 30(2), pp.239-254.
Wong, K. and Joshi, M., 2015. The impact of lease capitalization on financial statements and
key ratios: Evidence from Australia. Australasian Accounting, Business and Finance
Journal, 9(3), pp.27-44.
Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating
to capitalised leases. Pacific Accounting Review, 29(1), pp.34-54.