ACCG224 Financial Reporting: Disclosures in the Australian Sector

This report delves into financial reporting disclosures within the Australian corporate sector, focusing on the impact of new accounting standards, particularly AASB 16 (Leases). It examines how companies like Woolworths adapt their financial reporting to comply with these evolving standar...Read More

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Financial Reporting Disclosures
in the Australian Corporate
Sector

Reporting
Executive Summary
From the report, it is observable from the annual report of Woolworths that it can possess an
immense financial after severe variations in the accounting standards. Therefore, it is crucial
for the company to provide a simple description to all the stakeholders in relation to such
lease contracts. Hence, after implementation of new standards, there can be no more
questions betwixt the departments of the company prior to entering or agreeing to a lease
contract and undertaking the function of corporate reporting
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Contents
Introduction...........................................................................................................................................4
a. Description of the lease.................................................................................................................4
b. Potential impact from the application of new rules......................................................................5
c. Evaluation......................................................................................................................................6
d. Conclusion.....................................................................................................................................7
References.............................................................................................................................................8
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Introduction
The right to utilize an asset incorporates both restoration and indirect expenses and there are
no variations in the accounting of a company’s lessor. Therefore, it is still required that the
underlying asset of companies is depicted in association with the agreement of lease that can
be visible in the financial statements. Furthermore, for addressing the sales or financing
arrangements of the company, it is crucial for them to pave a path in a manner that can reflect
all residual interests and receivables that have been incurred in association with the same.
a. Description of the lease
AASB 16 (leases) has played a key role in disengaging present requirement of accounting for
leases under the AASB 17 (leases). Further, based on current requirement, lease classification
of the company has been undertaken based on their nature that have been recognized in its
performing leases or consolidated statements. Besides, the categorized accounting for
performance of leases (as a lessee) can result in recognition of ROU (right of use) asset and a
related liability of lease on the consolidated financial position statement. Nevertheless, the
liability of lease projects that the present value of payments of future lease of the company
has been incorporated by excluding all short-term leases (Vaitilingam, 2014). Moreover, an
interesting expense of the company has also been recognized on the lease liabilities and
depreciation costs are also recognizes for the ROU assets and there shall be an addition for
disclosing the requirements based on a new pattern. Nevertheless, the company’s accounting
for leases (as a lessee) also remains unchanged based on AASB 16.
Such standard is required for corporate reporting in the present scenario and the company has
decided to implement AASB 16 in the starting financial year 2019. The objective of the
project is to ensure high-quality performance based on the current accounting standard and
such project also encompasses members from property, treasury, and finance functions with
supervision from the company’s CFO. Further, the primary duties of the company’s project
also cover budgeting, accounting policies, impact assessment, implementation of prices,
identifying system requirements, and finishing the implementation strategy. As at the
termination of reporting tenure, the company’s committee also possesses non-terminable
unrelated commitments of operating lease amounting to $24,438.8 million. Besides, these
commitments are generally associated with the discount premises, distribution offices,
warehousing functions, support offices that must be needed to recognize related lease
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liabilities and ROU assets (Woolworths limited 2017). Overall, the company has been
currently supervising the impact of new necessity on the financial statements. Nevertheless,
both qualitative and quantitative disclosure will be added when the determined project
enhances further (Needles & Powers, 2013).
b. Potential impact from the application of new rules
The new standard of accounting can play a key role in making many alterations in the
company’s financials when the same is implemented by the industry. The AASB board has
also designed various changes that must be facilitated based on the requirements of AASB 16
for Leases. Further, the primary focus in relation to this is on the eradication of differences
betwixt both financing and operating leases as most of the company’s leases are being
portrayed under the balance sheet. Besides, the implementation of AASB 16 will not become
effective in the company’s financials but will eventually be utilized by all the corporates. The
implementation of the new standard can influence every industry in the market. Moreover,
based on the present accounting standards, there are rules that reflect future payments under
an agreement of operating leases that is not depicted in the balance sheet (Ross et. al, 2014).
Further, many shareholders and investors of the company are concerned that this can result in
an inappropriate depiction of its financial performance or position. The alterations that have
been undertaken in the accounting standards can also result in a valuation of lease liabilities
and right to utilize the assets in the financials. Nevertheless, the company will now encounter
expenses incurred towards the maintenance of leased assets. Further, implementation of such
standard can assist the company to portray the financial position properly but shall also assist
in provision of useful details to shareholders and investors for decision-making. In addition,
the variations observed eventually can also enhance the data complications in the financial
statements and the reason behind this is because of adoption of new standard.
The new standard is also believed to alter the nature of expenses forming part of the
financials. Such expenses cannot be ascertained through a straight-line rental bases and
instead, is computed based on estimated profits and early years, thereby resulting in
enhancement of net profits (Woolworths limited, 2017). Further, it must be observed that the
anomalies of financial reporting can incorporate the ROU assets that are of non-current
nature while the lease liabilities also have two significant choices (non-current and current)
that companies are bound to make. In addition, the company can also encounter
incompetency in front of other players that can result in massive contraventions. Therefore, it
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is crucial for companies to approach their finances prior to adopting proactive strategies.
Another major influence is in relation to huge proprietary expenses is the right to utilize
assets on the financials for enhancing total assets (Petty et. al, 2012). Besides, if it is
observable during the auditing of financials, it must be lodged under the report that can be
evaluated by all stakeholders. Overall, the analysts have suggested the company to
understand the variations that will be influencing the entire business through recognition of
extent and type of contracts through operation by adhering to the standards.
c. Evaluation
The leasing function is believed to be the most widely utilized and relevant financing affair of
the companies in the current scenario. It plays a key role in allowing an organization own an
asset without the problem of incurring enormous outflow of cash. Besides, it also assists it in
safeguarding the asset from the risk of residual value that clearly outlines the relevance of
conceptual framework for corporate reporting. Further, it is the only method that can be
implemented by companies to utilize on a physical asset that is not able to be bought by it.
Moreover, based on current statutory rules, the transactions of leases are segregated under
both financial and operating lease based on economical and complicated nature.
Nevertheless, after implementation of new standards, it has become benevolent for
companies to evaluate all kinds of lease prior to reflecting the financials so that the right to
utilize an asset can be properly depicted. This can ensure reliability on the part of users in
their decision-making process.
Further, all lease liabilities of the company are also recorded based on the terms of lease that
assists in determining its extension tenure if any. Nevertheless, the adoption of IFRS 16 is
also equivalent to the new IAS 17 that projects several contracts data associated with the right
to utilize such asset for a specific time period. There are also few exemptions that is prevalent
for the intangible assets’ lease apart from the mentioned leases. The new framework designed
by the AASB can assist in offering a clearer difference betwixt the financial and operating
lease that can further help in eradicating any problems associated with the agreements and
principles based on leases (Porter & Norton, 2014). Further, it is crucial for all lessees to
identify the right of utilizing an asset that have been based on the discounted payments under
agreements of lease so that the terms of lease are also duly accounted for. This can allow
users in taking effective decisions so that the objectives of GPFR are duly addressed.
Moreover, the useful characteristics of conceptual framework like understandability,
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relevance, materiality, etc is also addressed through such new standard in financing reporting
(Gowthrope, 2011).
d. Conclusion
In relation to implementation of new accounting standard, companies must prepare for the
implementation of what is changing. They are required to review such new accounting model
and ascertain the implications for such change that includes areas that are exposed to massive
changes (Deegan, 2011). In other words, it is crucial for companies to stay updated for
significant changes in the interpretation of such new standards. Thereafter, companies must
facilitate in proper team and planning through a cross-functional team so that a plan can be
designed with efficient project management to encounter such new accounting treatment.
Lastly, since every aspect of present lease accounting treatment are not changing, companies
must evaluate what arrangement of lease prevail and the lease procurement, lease accounting
functions, lease administration, etc that assist such arrangements in comparison with the
necessitates of the new standard. This can altogether allow them in ascertaining the extent of
variations that is needed and thereafter, design or plan the transition.
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References
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Gowthrope, C. (2011) Business accounting and finance for non specialists (3rd ed.). South
Western
Needles, B.E., & Powers, M. (2013) Principles of Financial Accounting. Financial
Accounting Series: Cengage Learning.
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012)
Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education
Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker.
Texas: Cengage Learning
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT
Prentice Hall.
Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online]
Available from:
http://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2017.pdf
[Accessed 30 September 2018]
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