Financial Accounting Report: Woolworths Lease and AASB 16 Impact

This report provides an executive summary of Woolworths' lease agreements and their financial reporting implications, particularly focusing on the impact of the new AASB 16 standards. It begins with an introduction to the changes in accounting standards and their relevance to organizations. The report then describes the nature of leases and the key aspects of AASB 16, including the shift from operating and financing leases to a single model, and the recognition of right-of-use assets and lease liabilities. It further details the potential impact of these changes on Woolworths' financial statements, including the increase in asset values and changes in expense recognition. The report evaluates the implications of the new standard, highlighting the importance of accurate assessment of all leases, and provides a conclusion summarizing the key findings and the need for companies to adapt to the new accounting requirements. The report also includes references to relevant sources.

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ACCG224: Financial Accounting and
Reporting

Woolworths
Executive Summary
In the present scenario, the organizations are having various lease agreements and the
regulations concerning the same are having an impact on the financial statements. In this
report, Woolworths is selected for the purpose of the report. In the report, the lease is
described and summary of the new rules is present in a vivid manner. Further, the potential
impact of the same has been shown in the report.
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Woolworths
Contents
Introduction...........................................................................................................................................3
1. Description of lease.......................................................................................................................3
2. Potential impact............................................................................................................................4
3. Evaluation......................................................................................................................................5
Conclusion.............................................................................................................................................8
References.............................................................................................................................................9
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Woolworths
Introduction
The new accounting standard is going to make several changes in the financial statements of
many organizations whenever it will be adopted by the industry. The Australian Accounting
Standards Boards have also stated many changes that are needed to be made in accordance
with the AASB 16 leases. The major focus will be on the removal of the distinction between
the operating and financing leases because most of the leases are now being stated under the
balance sheet. The application of AASB 16 will not be effective immediately but will be used
eventually by the organizations.
1. Description of lease
AASB 16 Leases will disengage current accounting necessity for leases under AASB 117
leases. Under present necessity, classification of leases is done on the basis of their nature as
either finance leases, which are identified on the Consolidated Statement of Financial
Position or performing leases, which are not identified on the Consolidated Statement of
Financial Position. The categorize accounting for performing leases as a lessee will result in
the identifying of a right-of-use(ROU) asset and an associated lease liability on the combined
Statement of Financial Position. The lease liability reflects the current value of future lease
payments, with the exclusion of short-term leases. An interesting cost will be identified on
the lease liability and a depreciation expenses will be identified for the ROU assets and there
will be an addition for disclosure of necessity under the new pattern (Porter & Norton, 2014).
The categorize accounting for leases as a lessor remain unaltered under AASB 16. AASB 16
is operative for final reporting duration starting on or after 1 January 2019, the group will
apply AASB 16 in the starting of financial year 1 July 2019. The motive of the project is to
assure high-quality performance in agreement with the accounting standard, the project
includes members from finance, treasury and property functions with oversight from the
Chief Financial Officer. Main responsibilities of the project cover setting accounting policy,
warping up an impact assessment, budgeting, and pricing of implementation, recognizing
data and system necessities and concluding the implementation plan (Needles & Powers,
2013). As at the conclusion of reporting duration, the committee has non-cancellable
unrelated operating lease commitments of $24,438.8 million, these commitments primarily
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concern to its discount premises, warehousing functions, distribution offices, and support
offices which need to identify of ROU assets and associated lease liabilities.
As per the information gathered, the group has set up or has been bound to to get a non-
avoidable and non-discounted operating lease that would amount to be $24,438.8 million.
Retail prices, warehousing facilities, distribution centers and support offices are some of the
top related statements and they are to be supported by the ROU assets in accordance with the
simultaneous respective liabilities (Woolworths limited, 2017).
The group is now involved in the task of scanning an noting the consequences and the
situations that will arise for The Group’s Consolidated Financial Statements. But attention
should also be paid to the fact that the financial ratios of the company will also increase as the
consolidated financial statements get on high which will have a dominance to the financial
position of the company (Vaitilingam, 2014). With the continuation of the project, both the
qualitative and quantitative exposures will be gathered.
The group is presently inspecting the influence of the new necessity on the Group’s
Consolidated Financial Statements; though the impact is anticipated to materially ‘gross-up’
the Group’s consolidated Statement of Financial Position influencing main financial ratios.
Quantitative and qualitative disclosure will be added as the project improves further
(Woolworths limited, 2017).
2. Potential impact
The application of the new standard with affects every type of business in one or another. In
accordance with the current accounting standards there are rules that state to make future
payments under an operating lease agreement which is not depicted in the balance sheet.
Many investors and shareholders were having the concerned that this will lead to improper
reflection of the financial position of the organization.
The changes that have been made in the various accounting standards will also result in the
valuation of lease liability and the right to use the asset in the balance sheet. This can also be
understood by saying that the organization will now face the expenses that are being made in
the maintenance of the leased asset. Application of this new standard will not only help the
organization to represent the financial position of business in a better manner but will also
provide useful information to the investors and shareholders for the purpose of decision
making (Ross et. al, 2014). The changes that will be observed eventually may also increase
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Woolworths
the complexity of the data and hidden risks may arise because of the implementation of the
new standard.
The new standard is said to change the nature of expenses. The expenses will not be
calculated on a straight line rental expense but will be calculated on the basis of early years
and estimated profits. This may also increase the net profit of the organization. It should be
kept in mind that the financial reporting anomalies will consist of the right to use the set that
will be non-current in nature whereas the least liability will be having two major divisions
current and non-current between which the organization have to make the choice (Petty et. al,
2012).
The organizations may also face serious to become incompetent in front of banks which
could lead them to various possible breaches. Hence it is very important for the organizations
to approach their finances before making any proactive decisions by it. Another impact that
can be observed by the company is in terms of the large proprietary companies is the right to
use Assets on their balance sheet for increasing the total Assets. If it is observed while
auditing the financial statements, it should be lodged under the report which can be analyzed
by the investors and shareholders (Woolworths limited, 2017). The analysts have advised the
organizations in order to understand the changes that will be affecting the businesses by
identifying the types and extent of the contracts that will be working in accordance with the
standards.
It may be observed that the organizations may have a huge balance sheet after the specific
changes in the standards. Hence it will also be necessary for the organization to provide a
basic explanation to the investors, finances, and shareholders of the company in this context.
Also, after the application of new standards, there will be no more interrogation between the
different departments of the organization before entering into a lease agreement and
conducting the financial reporting function (Kieso et. al, 2010).
3. Evaluation
The function of leasing is one of the most important and widely used financing activities of
an organization. It not only helps the company to own the asset without incurring large cash
outflows but it also enables it to protect the asset from residual value risk. Also, sometimes
leasing is the only method that can be applied by an organization to use on a physical asset
that cannot be purchased by it (Hamilton, Hyland & Dodd, 2011). Under the existing rules
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and conditions, the lease transactions are divided under the operating and financial leases on
the basis of complexity and economical nature of them. after the application of the new
standard, it has been made important for the organization to assess all different type of leases
before depicting retain the balance sheet so that the right to use an asset can we clearly
reflected in relation to a particular period of time. All the lease liabilities are also measured in
relation to the lease terms which further helps to decide the extension period of a lease
(Woolworths limited, 2017).
The application of the IFRS 16 is very similar to the IAS 17 which states the various
contracts data related to the right to use an asset for a particular period of time. There are still
some exemptions present for the leases of intangible assets other than the leases mentioned.
The new model that has been standardized by the AASB will provide a clear distinction
between the operating and financial leases which can further help to eliminate any kind of
problems in relation to the principles and agreements based on the leases. It has also been
stated that it is very important for the lessees to recognize the right to use an asset that are
based on the discounted payments under the lease agreements so as to take into account the
lease terms that have been determined by the help of new standards. The right to use an asset
also contains indirect and restoration costs (Gowthrope, 2011). There are no changes in the
counting of the lessor. It is still needed to reflect the underlying asset in relation to the lease
agreement that has been clearly mentioned in the balance sheet under the operating sector.
For fulfilling the financing arrangements or sales, it is very important for the balance sheet to
reflect all the receivables and residual interest that have been incurred in relation to the lease.
The most commonly followed trend and financing factor in the present time is the leasing
function. This factor ensures that the company may not have large chunks of income to
inherit a particular asset. Residual value threat is almost mitigated which is simultaneously
related to the conceptual framework of the corporate reporting system (Deegan, 2011). The
company is free to chose and use the physical asset which they want that was not possible
earlier. All the transactions related to lease are diversified in two facts which are the
economical and the complicated behaviour factor. After the setting up of new standards it has
been crucial for the company to set up all the leases prior to the presentation of the financial
report so that the financial reputation and the asset ownership status is maintained.
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Conclusion
The company must remain attentive to make changes according to the new standard rules and
with the changes in the market. Accounting model and areas must be scanned regularly which
are competitive in nature so that the changes that aare to be brought can be understood. It can
be concluded that the companies need to be updated and follow the new trends as son as
possible. A team with diversified idea needs to be formed to observe and situation and plan
from each angle as per the following of the new standards. There are changes being made but
not with respect to the lease category and some remain intact which are lease procurement,
lease accounting functions, lease administration and may more which are a differentiation for
the new standards.
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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
Hamilton, K., Hyland, B. and Dodd, J. L. (2011) Impairment: IASB-FASB Comparison.
Drake Management Review. [online]. 1(1), p. 55–67. Available from:
https://pdfs.semanticscholar.org/8d8f/5fd070193d6fa52e79d1dee9cc6632159d8a.pdf
[Accessed 1 October 2018]
Kieso, D., Weygandt, J., Warfield, T; Young, N. and Wiecek, I . (2010) Intermediate
accounting. Toronto: John Wiley & Sons Canada.
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 2 october 2018]
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