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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