The Essay On AASB 16 And AASB 15's Impact On Financial Reporting And Accounting Policies.

The new accounting standard on leasing, AASB16 Leases, will replace the existing leases standard, AASB117. It will remove the classification of leases that  as been used for decades and which divides leases into operating and financial leases from the perspective of lessees. The new standard requires leases that were formerly known as operating leases (and were kept off balance sheet) to be recognised for balance sheet proposes (both an asset and a liability will be recognised).

Required:

1) Evaluate how total assets, total liability and equity would be affected by the new accounting standard on leasing from the perspective of lessees.

2) The changed standard means that leases with a short-term (e.g., several months) will appear on a balance sheet of lessees, as will leases with a longterm (e.g., multiple years). Discuss whether this new approach is consistent or inconsistent with the definitions of assets and liabilities included within the IASB Conceptual Framework.

AASB 16 and its Impact on Financial Reporting

Requirement 1

AASB 16 brings with itself single lessee accounting model and requires a lessee to recognize all the assets and liabilities of the leases which have a time period of more than 12 months. If the underlying asset is of low value, then there is no need to recognize it. This new standard brings many changes in lease accounting used by many companies. Specifically, the lessee accounting changes to a great extent and minor changes were there in the books of lessor. As per this, organizations are required to report all the financial and operating leases on their balance sheet. This affected total assets, liabilities and equity to a great extent (KPMG. 2017).

Total assets

AASB 16 requires companies to report all the liabilities and supported assets which are related to operating leases with a period of more than 12 months. Due to this change in accounting, the assets of the company rise. It will be shown on its balance sheet.

Total liabilities

The same impact will be there on the total liabilities of a company. As per the new lease standard companies have to report off balance sheet leases which includes operating leases. Such treatment will increase the liabilities of a company.

Total equity

There is no significant change on the value of company’s equity but overall the enterprise value will change. In addition to this, some financial metrics will also get impacted.

Overall, AASB 16 will definitely impact the balance sheet if lessee and increase its total assets and liabilities, keeping the equity same. Due to such changes, EBITDA of the company will also increase.

Requirement 2

A revised conceptual framework is been published by International Accounting Standard Board (IASB) which include revised definition of assets and liabilities. It also gives new guidance on recognition, presentation and disclosure. The updated framework includes all the topics which are not yet covered before (Iasplus.com. 2018).

According to the framework, the assets are defined as the present economic resource owned by an enterprise, as a result of past event. In other words, it is a resource which has a potential to generate economic benefits. Liabilities are defined as a present obligation of an enterprise which requires a transfer of an economic resource as a result of past events (Iasplus.com. 2018). The new lease standard provides all the type of leases to be recorded on the balance sheet. Such leases include some assets and liabilities which have occurred from the past events. Also as per the framework, proper disclosure of every transaction is must. AASB 16 requires companies to do the same by reporting all the lease associated liabilities and assets on the balance sheet. So it can be said that, new approach is consistent with the definitions of assets and liabilities given by the conceptual framework of IASB.

Revised Conceptual Framework and its Alignment with AASB 16 and 15

Part B

Requirement 1

According to AASB 15, standard on Revenue Recognition, Revenue is recognised for the amount the company is to be entitled. There is a transfer of goods or services to a customer for that particular amount. Depending upon the requirements of meeting the criteria, the revenue is recognised either over time or at a point of time. The five step model is applied to determine the when to recognise and at what time.  First the contract needs to be identified, identify the performance obligations, determine the price of the transactions, after determining the allocation of the prices of the transactions is done and lastly the revenue is recognised.

AASB15 affect the organisation can be very, but the new revenue standard also presents the different opportunities. The standard’s impact has a great magnitude, only after the company commences its introduction.

Organisations do need to take into account the following points.

• Timing of recognition and amount of revenue recognised may change.
• Changes to systems are also required
• Extensive new disclosures will also be necessary.

As per revenue recognition policy of the Microsoft company revenue for retail packaged products and the products for which the license is obtained is generally recognised when the products are shipped or made available. Revenue is recognised when persuasive evidence of arrangement exists, delivery has occurred, the fee is of fixed nature and where the collectability is probable.  Revenue related to the games when published by the third parties is recognised when the games are manufactured by the publishers of the game (Microsoft.com.2013).

Requirement 2

Positive accounting theory is the one which deals with estimating the actions such as choices of accounting policies by companies and how they respond to the new accounting standard. It helps in predicting the facts that management of a company will use while making their accounting policies. The theory consists of three hypothesis named as bonus plan, debt covenant and political cost hypothesis (Humayun, 2011).

The debt covenant hypothesis says that if a firm is closer to violating its debt covenant, then the firm manager will more likely to select the accounting policies and procedures that will shift the reported earnings from future time period to current period. In addition to this, the hypothesis also stated that by increasing the firm current earnings, the company will less violate its debt covenants (Humayun, 2011).

The same is been observed in case of Microsoft. Earlier the company recognized 25% of its revenue from its Windows software. However, with a launch of Vista 2008, the company policy of revenue recognition changes and it stared recording its revenue in the period the product was sold. As a result of which Microsoft earnings increased by 65%. This decision of changing the policy let the company to shift their earning in current period and also raises its income. This resulted in less violation of debt covenants and was an appropriate decision taken by the management in terms of debt hypothesis. The decision completely follows the hypothesis which in a way led the company to succeed and grow.

Part-C

Requirement-1

Requirement-2

Requirement-3

Requirement-4

References

Humayun, K. (2011). Positive Accounting Theory and Science. [Online]. Available at: https://www.researchgate.net/profile/Humayun_Kabir14/publication/228118770_Positive_Accounting_Theory_and_Science/links/59ebc8a04585151983cb769a/Positive-Accounting-Theory-and-Science.pdf?origin=publication_detail [Accessed on 21 May 2018].  

KPMG. (2017). AASB 16 Leases. [Online] Available at: https://assets.kpmg.com/content/dam/kpmg/au/pdf/2017/aasb-16-fundamental-overhaul-lessee-accounting.pdf  [Accessed 21 May 2018].

Microsoft.com. (2013). Accounting Policies. [Online] Available at: https://www.microsoft.com/investor/reports/ar13/financial-review/notes/index.html [Accessed 21 May 2018].

Iasplus.com. (2018). IASB publishes revised Conceptual Framework. [Online] Available at: https://www.iasplus.com/en/news/2018/03/cf[Accessed 21 May 2018].