ACCTING2501 Financial Accounting

As a new accounting graduate you have recently joined the accounting department of an ASX listed company. To complete this assignment, you will need to select a suitable company yourself that meets the following criteria:

Introduction

Accounting Standard AASB 117 Leases has been formulated by Australian Accounting Standard Board according to section 334 of Corporation Act 2001 as on 15^th July 2004. Its major objective is to apply the accounting standards and disclosures regarding the lessees and lessors. As per Part 2M.3 of the Corporations Act, it has been applied to every company which is required to prepare the financial statements as per the prescribed format. It has been implemented on all the yearly reporting periods initiating from and after 1^st January 2005( Joubert, Garvie and Parle, 2017).

Regarding the application of a single lease model requiring the lessee to analyze the liabilities and assets for a period of not less than 1 year, a new accounting standard has been introduced as AASB 16. It forwards the accounting requirements of the lessor according to AASB 117 Leases. It would be enforced on or after 1^st January 2019.

So, this report is formulated with an intention to illustrate the difference of prosed accounting standard AASB 16 and the presently applicable AASB 117 and its effect on the lease agreement of Telstra, an ASX listed company. The effects of the proposed changes on the economic costs to be borne by the company shall also be stated in this report. The newly adopted accounting standard would be analyzed in the light of GPFR and recommendations would be given for preparing the company regarding the new accounting treatment.

(a)Description of the lease possessed by the company and their classification and presentation in the annual report as per AASB 117 and AASB 16

AASB 117 includes the doctrines of IAS17 Leases as altered by International Accounting Standards. It is implemented for all the corporations preparing their financial statements in accordance to Part 2M.3 of the Corporations Act with the general-purpose financial reports of every reporting entity.

AASB 117 cannot be implemented for forming the basis for measuring the investment property according to the lessor as per operating property and leases held by the lessees as the investment property according to AASB 140. It cannot be applied to the biological assets as per AASB 141. So, it is only applicable to agreements which are allotted the rights to use the assets for substantial services regarding the maintenance and operations to be called by the lessor( Laing and Perrin,2014).

As mentioned in the annual report of Telstra, the financial and operating leases are being distinguished and stated in the financial reports of the company. The assets namely property, plant and equipment are categorized under the finance lease and being capitalized at the starting of the lease term. They are evaluated at the lesser of the fair value of the assets and the current value of the future minimum lease payments (Xu, Davidson and Cheong, 2017).

A corresponding liability is also formulated and the lease payments are allocated between the finance and liability charges. Further, the cost of improvements is also capitalized as leasehold improvements. They are repaid either over the useful life of the improvements or time period of the lease whichever is shorter. It has also repaid the amount of finance lease principle amounting to $131 Million in 2017(Telstra, 2017).

AASB 16 has been introduced as a sole lessee accounting model which requires the lessee to analyze liabilities and assets for all the leases applicable for not less than 12 months until the underlying asset’s value is low. A lessee must analyze the right-of-use of the asset so that it can represent the authority for using the principal liability and asset representing the accountability to make the payments of the lease. It involves the requirement of the disclosures for the lessee (Barone, Birt and Moya, 2014).

The lessee needs to implement the decision for determination of the information for disclosing to accomplish the objects to provide the basis for the users of the financial report for assessing the impacts the lease could have on the cash flows, financial performance and position of the lease.

(b)Analysis of the probable impacts on the financial position and performance of Telstra due to the newly applied rules to the present lease contracts

As stated in the annual report of the company, the operating lease commitments of the company amount to $ 262 Million and the financial lease commitments amount to $341 Million in 2017. So, the transitions introduced by AASB 16 Leases would have an effect on the financial statements of the corporation as it requires all the leases to be stated in the balance sheet of the company. The transitions related to the expenses of the lease would also be illustrated in the financial reports of Telstra (Telstra, 2017).

It would also comprise of the preexisting leases so that the retailers contemplate the effect created on the long-term lease agreements beside the new ones. As per AASB 16, the short-term leases and those on small assets have been excluded from its scope. All the leases except these would be mentioned in the balance sheet as a liability resultant from the right to use the asset. The transitions in the expenses would be analyzed in two ways viz.   the method of representation in the income statement and cost of timings per year of the lease (Rahman, 2013).

(c)Evaluating if AASB 16 would improve the financial reporting in the context of Conceptual Framework and objectives of GPFR

The conceptual framework for General Purpose Financial Reports (GPFR) provide appropriate information so that the needs of the external users. It caters to the wide group of people pertaining to different ranges of activities. The companies use these statements to communicate the performance with stakeholders outside the company.

AASB 16 leases would improve the financial reporting as it follows the objectives of General Purpose Financial Reports. The accounting standard evaluates the users of general purpose financial reports such as board, shareholders, consumers, government and employees etc. and analyzes the broader type of information which is consistent with those needs (Wong and Joshi, 2015). 

A set of general financial statements comprise of balance sheet, income statements,  statement of owner’s equity and retained earnings and a statement of cash flows. So, AASB 16 lease pertains to the disclosure of leases and their capitalization in the financial statements of the company (Diaz and Ramirez,2018).

(d)Conclusion and Recommendations to prepare Telstra for the new accounting treatment

Hence to conclude, it can be said that since the implementation projects are costly and they require extensive data for their transition. AASB 16 Leases would be implemented from 1^st January 2019. It includes a single lease model for lessees and it does not differentiate operating and finance leases. So in order to limit the costs and ease the complications of the changes, AASB 16 comprises of several approaches (Deloitte, 2016).

The company has a variety of options to choose regarding the effective date and practical methods to select from. The company has the option to apply the newly introduced accounting standard to all the contracts or only the existing ones. Selecting the existing ones would be a favorable option to decrease its assessment cost as no further data retrieval would be needed in this regard.

In this case, if the existing lease is not mistakenly treated as leases as per AASB 117 then the required disclosures will reveal such errors through explaining the difference between the lease commitments as under AASB 117  just before the application of AASB 16. The liabilities of the lease shall be recognized in the balance sheet when it would be initially applied (Morris, 2017).

References

Barone, E., Birt, J. and Moya, S.(2014) Lease accounting: A review of recent literature. Accounting in Europe. 11(1), pp.35-54.

Deloitte (2016) Leases A guide to AASB 16 [online] Available from: https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-aasb-16-guide-220916.pdf [Accessed 26^th September, 2018].

Diaz, J.M. and Ramirez, C.Z.(2018) The Impact of IFRS 16 on Key Financial Ratios: A New Methodological Approach. Accounting in Europe . 15(1) , pp .105-133.

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),pp. 1-10.

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.

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.

Rahman, A.R.(2013)  The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of its Participative Review Process. NY: Routledge. pp. 1-10.

Telstra (2017) Telstra Annual Report 2017[online] Available from: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20F/Annual-Report-2017.PDF [Accessed 26^th September, 2018].

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.

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.