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HI6025 Accounting Theory and Current Issues - Holmes Institute

Purpose: Critically examine the Australian accounting standard for lease financing AASB 16. They will have to do research on relevant literature and demonstrate.

ACCOUNTING FOR LEASES: A CRITICAL REVIEW:

Question: What changes have been incorporated in the new accounting standard for lease AASB 16?

Solution:

CHANGES INCORPORATED IN THE NEW ACCOUNTING STANDARD FOR LEASE AASB 16:

The standard on lease was introduced and will come into effect on 1st January 2019 by the International Accounting Standard Board, named as IFRS 16. According to the new accounting standard, there were changes made in the provision of accounting with respect to accounting made by the lessee in its books of accounts (Angela Wheeler Spencer and Thomas Z. Webb, 2015). The lessee is required to record and show all the lease arrangements in its statement of position i.e. the balance sheet. Every company using the rental or leases as lease obtaining mode will have effect of the new standard on them. However, there are certain exceptions on the same wherein the lease is not recorded in the balance sheet in cases when the lease is of short term nature and the value of the asset leased is low. The standard was revised so as to include all the Australian entities working on lease to be covered under this. The most important change brought in was the accounting of lease (AASB, 2016). The lease liability was now required to be recorded in the balance sheet so that the same is given focus by the board and the management while assessing the financial position of the lessee. The impact of lease on the loans, ratios, remuneration and bonus is also required to be assessed. The new standard had made entities alert while reporting for leases in their books of accounts and the same is required to be implemented at the earliest for avoiding any confusion. The new standard redefines the common used metrics of finance being off balance sheet in nature and uses gearing ratio and EBDITA for their comparability. All these will affect the covenants, credit ratings, cost of borrowings and the perception of stakeholders of the company.

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Question: How will companies that have significant level of lease financing be affected by the change in the accounting standard for lease?

Solution:

EFFECT ON COMPANIES HAVING SIGNIFICANT LEVEL OF LEASE FINANCING BY THE CHANGE IN THE ACCOUNTING STANDARD AASB16:

The impact on companies that have high amount of lease financing is significant. There will be effect on all the business to some extent. The most important thing that came out of the new standard is to be proactive and to be prepared (Deloitte, 2016). The business after the introduction of the new standard requires to report the cost of use of the assets held under lease arrangement along with the benefits associated with them on their statement of position (Deqiu Chen, Ming Liu, Tao Ma and Xiumin Martin, 2017). The changes in AASB 16 have resulted in providing more clear and accurate presentation of the financial position as because all the liabilities is being reflected in the balance sheet, which was not being done earlier. There was provision of providing information that would be more useful for all the stakeholders of the company for assessing the financial position of the company. The changes introduced under the new standard have increased the level of risk of reporting financially as well as commercially.

There have been increase in complexity because of implementation of the new standard. The companies having significant level of lease financing will have the following effects:
• The profile of the expense will be changed. The expenses will not be a straight line one rather they will be higher initially and less in later years
• The right to use asset will be non-current asset whereas the liability of lease will be split between current and non-current
One of the major impact is that there will be increase in the number of companies qualifying as proprietary companies adopting the new standard.

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