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a) With reference to MYR identify and summarise the current accounting policies (AASB117) relating to leases of premises.
b) With reference to MYR identify and summarise the proposed accounting policies (AASB 16) relating to leases of premises.
c) With reference to MYR explain the potential impacts of the changes in the accounting standard on the financial reports (balance sheet and income statement impacts).
d) Evaluate the potential economic consequences for MYR of the changes the accounting standard. This should be answered using the accounting theory related to the use of financial reports (Week 0 material)

Objective and Requirements of the Standard

1). The AASB  117 standard deals with leases. This standard requires:

  • a lessor and a lessee  to classify the lease. The classification can either be a  finance lease or an operating lease. This depends on its economic substance
  • An operating lease recognises lease payments as an expense on a straight line basis, . The systematic basis represents the time pattern of the  basis of the user(Tan?Kantor, Abbott and Jubb 2017).

The objective of this standard is to prescribe lessors and lessees. This relates to the disclosures of aggregate accounting policies  in relation to leases. According to this standard, a lease is an agreement. In this agreement the lessor conveys the lessee an asset  in exchange  for a payment . This is set for a fixed  time period.  A lease can be classified as a financial lease if it transfers  all the risks and rewards that are related to ownershop of assets . It can be classified as an operating lease if it does not transfer  all the risks and rewards  that are entitled to ownership. The lease shall recognise lease as assets and their liabilies  in the balance sheet . This valuation will be done at a similar amount  to the fair value of the property that is leased (Wong and Joshi 2015). 

 In terms of the company Myer , the accounting policy of lease rights represent the amount that is  paid in advance  to take over the store site leases from the existing leases Lease rights are amortised over the term of the lease. In addition to the renewal options, thse lasing rights  are of  judicious certainty that can  be utilised at the time of acquiring the  rights of the lease. It also has  a support office that provides lease in relation to the excess office space that is  identified within the premises of the office. the valuation is based  on the discounted future cash flows  that operates under a  non cancellable lease . This non cancellable laease will expire in 2022. The  expected future expected rental income is to be subtracted to arrive at the actual valuation (Laing and Perrin 2014).  The organisation  has  other number  of leases as well. These leases include fixed rental  leases. As per the AASB 117 the total rentals  over these leases are being allocated on a straight line basis . The above facility signifies the gap between the future lease payments  and the  future expenses. A part of the office lease  is recognised during the period,. Due to this a recognition, a   provision has been written back. This will reflect the readjusted total future expense that is  expected over the  lease term that is remaining

2). Lease incentives are received on entering . They are  recognised as deferred income . They are  ammortised and  charged to the income statement on a straight line basis over the period of the lease.

The proposed accounting policies relating to the leases include:

  • The company will lease most of its  stores and warehouses under non cancellable operating leases. These will all expire  within one to 30 years. These leases have escalation clauses, varying terms and  rights of renewal. By renewing the lease, the  lease terms  are negotiated again (Drew, Kortt and Dollery 2015)
  • As per AASB 116, a lease was released in February 2016 by the AASB. This statement analyses the classification between operating lease and financial lease. It will result in the recognition of a front loaded pattern of expense for most leases . This will also happen when there is payment of  annual  rentals. This will  be valid from  January 2019. It is probable  that there will be a material impact on the  consolidated statements of the company. It is also possible that in future years  the leases that  are currently classified as operating lease will need to be  brought on the balance sheet.Further the current lease that is  recognised as an operating expense needs to be substituted with a depreciation charge(Yao, Percy and Hu 2015). The company is  currently undergoing  how the impact of the new standard  will provide an estimate of the financial impact .

3). The company has made new and amended standards adopted by the Group. It has applied the following new standards or will apply in the future:

  • AASB 9- Financial instruments- These discourses the arrangement and recognition of financial assets and  liabilities. It also presents a new rule for hedge accounting . It also undertakes a new impairment model . This model is used for financial assets. The standard is not valid till  January 2018. There will be no material impact on the financial liabilities. This is because the new requirement only affects the financial liabilities  accounting. These are chosen at fair value through profit or loss. Further   the company does not have  liabilities of this nature..The company  has not evaluated how  the new rules will impact the hedging requirements. However it does not expect the impact to be material . The disclosures  are however required in the financial statements(Joubert, Garvie and Parle 2017).
  • AASB 15- Revenue from contract with customers- It is a new recognition standard.  This is the standard that states that  revenue must be recognised  when the control of goods or services are shifted by the customer at a price called transaction price. This standard is not valid  till January 1 2018. In this case,  the company does not expect a significant impact from this standard.
  • AASB 16- It was realised in February 2016. this was realised by the AASB. This standard removes  the classification  that is distinguished  between operating  and financial lease. It also makes way for  a single accounting model. The new model requires the recognition of leased asset. It also requires the recognition of a  conforming lease liability. All assets have a  lease  term of more than 12 months . The separate recognition of the depreciation charge  that is accrued on the leased asset will be recognised   as lease liability(Handley, Wright and Evans 2018). There are also accounting changes over the  duration of the lease. This standard is  valid  from January 1 2019 if and only if  AASB 15 is also adopted in an earlier manner. The implementation of AASB 16 is expected to have a material impact on  the financial statements because of  a lessee with a substantial portfolio .  Further , the operating lease expense is recognised in the income statement . This expense will be replaced with a depreciation and finance charge.

4). The potential economic consequences for changes in account standard include:

  • External risks- Macro economic factors including  the Australian dollar fluctuations in   interest rates , and poor consumer confidence, affect the company’s influence to attain growth. The company regularly examines and uses economic data .These will help alleviate the impact on sales . The new hedging practices will be able to fight the the business ‘s cyclical policy (Han 2014).
  • Competitive  risks- The retail industry of which Myer is a part of is extremely competitive. The company’s  position of competitiveness  may be negatively obstructed by  the possibility of entry of new players in  the market. These new accounting standards will provide a more competitive edge to Myer
  • AASB 16 will lead to an faster recognition of lease payments. These payments will be recognised in the profit and loss statement. The deprecation and interest component that is attached as part of the lease expense under this new standard will be higher in the early years . In a simple lease agrrement however  the simple lease expense  will be recognised under the current accounting standard. (Dudin et al.2016)
  • In terms of implementing AASB 15 the revenue recognition is done upon the satisfaction of accounting standards. This new standard will require the entity to measure  the obligations that the performance demands. Further it  determines what value do they assign to each performance obligation.  In this way the recording of revenue is met. This may result in  a noteworthy surge of the  revenue recognition’s volatility.. The same will be applicable for Myer as well.

References:

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting, Business and Finance Journal, 9(3), pp.27-44.

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.

Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models. International Journal of Critical Accounting, 6(5-6), pp.509-519.

Drew, J., Kortt, M. and Dollery, B., 2015. What determines efficiency in local government? A DEA analysis of NSW local government. Economic Papers: A journal of applied economics and policy, 34(4), pp.243-256.

Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.

Noaman, N., Ouda, H. and Christiaens, J., 2018. Indexing financial reporting information for heritage management. Economics and Management.

Yao, D.F.T., Percy, M. and Hu, F., 2015. Journal of Contemporary Accounting & Economics. Journal of Contemporary Accounting & Economics, 11, pp.31-45.

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).

Handley, K., Wright, S. and Evans, E., 2018. SME Reporting in Australia: Where to Now for Decision?usefulness?. Australian Accounting Review.

Ramos, P.L., Dey, D.K., Louzada, F. and Lachos, V.H., 2018. An extended poisson family of life distribution: A unified approach in competitive and complementary risks. arXiv preprint arXiv:1805.07672.

Han, M.F., 2014. Measuring external risks for Peru: insights from a macroeconomic model for a small open and partially dollarized economy (No. 14-161). International Monetary Fund.

Dudin, M.N., Frolova, E.E., Lubenets, N.A., Sekerin, V.D., Bank, S.V. and Gorohova, A.E., 2016. Methodology of analysis and assessment of risks of the operation and development of industrial enterprises. Calitatea, 17(153), p.53.

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[Accessed 15 July 2024].

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My Assignment Help. AASB 117 Essay On Leases Sets Standard. [Internet]. My Assignment Help. 2020 [cited 15 July 2024]. Available from: https://myassignmenthelp.com/free-samples/ac2091-financial-reporting/accounting-policy-of-lease-rights.html.

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