Description of the lease
The right to utilize an asset incorporates both restoration and indirect expenses and there are no variations in the accounting of a company’s lessor. Therefore, it is still required that the underlying asset of companies is depicted in association with the agreement of lease that can be visible in the financial statements. Furthermore, for addressing the sales or financing arrangements of the company, it is crucial for them to pave a path in a manner that can reflect all residual interests and receivables that have been incurred in association with the same.
AASB 16 (leases) has played a key role in disengaging present requirement of accounting for leases under the AASB 17 (leases). Further, based on current requirement, lease classification of the company has been undertaken based on their nature that have been recognized in its performing leases or consolidated statements. Besides, the categorized accounting for performance of leases (as a lessee) can result in recognition of ROU (right of use) asset and a related liability of lease on the consolidated financial position statement. Nevertheless, the liability of lease projects that the present value of payments of future lease of the company has been incorporated by excluding all short-term leases (Vaitilingam, 2014). Moreover, an interesting expense of the company has also been recognized on the lease liabilities and depreciation costs are also recognizes for the ROU assets and there shall be an addition for disclosing the requirements based on a new pattern. Nevertheless, the company’s accounting for leases (as a lessee) also remains unchanged based on AASB 16.
Such standard is required for corporate reporting in the present scenario and the company has decided to implement AASB 16 in the starting financial year 2019. The objective of the project is to ensure high-quality performance based on the current accounting standard and such project also encompasses members from property, treasury, and finance functions with supervision from the company’s CFO. Further, the primary duties of the company’s project also cover budgeting, accounting policies, impact assessment, implementation of prices, identifying system requirements, and finishing the implementation strategy. As at the termination of reporting tenure, the company’s committee also possesses non-terminable unrelated commitments of operating lease amounting to $24,438.8 million. Besides, these commitments are generally associated with the discount premises, distribution offices, warehousing functions, support offices that must be needed to recognize related lease liabilities and ROU assets (Woolworths limited 2017). Overall, the company has been currently supervising the impact of new necessity on the financial statements. Nevertheless, both qualitative and quantitative disclosure will be added when the determined project enhances further (Needles & Powers, 2013).
Potential impact from the application of new rules
The new standard of accounting can play a key role in making many alterations in the company’s financials when the same is implemented by the industry. The AASB board has also designed various changes that must be facilitated based on the requirements of AASB 16 for Leases. Further, the primary focus in relation to this is on the eradication of differences betwixt both financing and operating leases as most of the company’s leases are being portrayed under the balance sheet. Besides, the implementation of AASB 16 will not become effective in the company’s financials but will eventually be utilized by all the corporates. The implementation of the new standard can influence every industry in the market. Moreover, based on the present accounting standards, there are rules that reflect future payments under an agreement of operating leases that is not depicted in the balance sheet (Ross et. al, 2014). Further, many shareholders and investors of the company are concerned that this can result in an inappropriate depiction of its financial performance or position. The alterations that have been undertaken in the accounting standards can also result in a valuation of lease liabilities and right to utilize the assets in the financials. Nevertheless, the company will now encounter expenses incurred towards the maintenance of leased assets. Further, implementation of such standard can assist the company to portray the financial position properly but shall also assist in provision of useful details to shareholders and investors for decision-making. In addition, the variations observed eventually can also enhance the data complications in the financial statements and the reason behind this is because of adoption of new standard.
The new standard is also believed to alter the nature of expenses forming part of the financials. Such expenses cannot be ascertained through a straight-line rental bases and instead, is computed based on estimated profits and early years, thereby resulting in enhancement of net profits (Woolworths limited, 2017). Further, it must be observed that the anomalies of financial reporting can incorporate the ROU assets that are of non-current nature while the lease liabilities also have two significant choices (non-current and current) that companies are bound to make. In addition, the company can also encounter incompetency in front of other players that can result in massive contraventions. Therefore, it is crucial for companies to approach their finances prior to adopting proactive strategies. Another major influence is in relation to huge proprietary expenses is the right to utilize assets on the financials for enhancing total assets (Petty et. al, 2012). Besides, if it is observable during the auditing of financials, it must be lodged under the report that can be evaluated by all stakeholders. Overall, the analysts have suggested the company to understand the variations that will be influencing the entire business through recognition of extent and type of contracts through operation by adhering to the standards.
Evaluation of AASB 16/IFRS 16 on financial reporting
The leasing function is believed to be the most widely utilized and relevant financing affair of the companies in the current scenario. It plays a key role in allowing an organization own an asset without the problem of incurring enormous outflow of cash. Besides, it also assists it in safeguarding the asset from the risk of residual value that clearly outlines the relevance of conceptual framework for corporate reporting. Further, it is the only method that can be implemented by companies to utilize on a physical asset that is not able to be bought by it. Moreover, based on current statutory rules, the transactions of leases are segregated under both financial and operating lease based on economical and complicated nature. Nevertheless, after implementation of new standards, it has become benevolent for companies to evaluate all kinds of lease prior to reflecting the financials so that the right to utilize an asset can be properly depicted. This can ensure reliability on the part of users in their decision-making process.
Further, all lease liabilities of the company are also recorded based on the terms of lease that assists in determining its extension tenure if any. Nevertheless, the adoption of IFRS 16 is also equivalent to the new IAS 17 that projects several contracts data associated with the right to utilize such asset for a specific time period. There are also few exemptions that is prevalent for the intangible assets’ lease apart from the mentioned leases. The new framework designed by the AASB can assist in offering a clearer difference betwixt the financial and operating lease that can further help in eradicating any problems associated with the agreements and principles based on leases (Porter & Norton, 2014). Further, it is crucial for all lessees to identify the right of utilizing an asset that have been based on the discounted payments under agreements of lease so that the terms of lease are also duly accounted for. This can allow users in taking effective decisions so that the objectives of GPFR are duly addressed. Moreover, the useful characteristics of conceptual framework like understandability, relevance, materiality, etc is also addressed through such new standard in financing reporting (Gowthrope, 2011).
d. Conclusion
In relation to implementation of new accounting standard, companies must prepare for the implementation of what is changing. They are required to review such new accounting model and ascertain the implications for such change that includes areas that are exposed to massive changes (Deegan, 2011). In other words, it is crucial for companies to stay updated for significant changes in the interpretation of such new standards. Thereafter, companies must facilitate in proper team and planning through a cross-functional team so that a plan can be designed with efficient project management to encounter such new accounting treatment. Lastly, since every aspect of present lease accounting treatment are not changing, companies must evaluate what arrangement of lease prevail and the lease procurement, lease accounting functions, lease administration, etc that assist such arrangements in comparison with the necessitates of the new standard. This can altogether allow them in ascertaining the extent of variations that is needed and thereafter, design or plan the transition.
References
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Gowthrope, C. (2011) Business accounting and finance for non specialists (3rd ed.). South Western
Needles, B.E., & Powers, M. (2013) Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker. Texas: Cengage Learning
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014) Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT Prentice Hall.
Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online] Available from:
https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2017.pdf [Accessed 30 September 2018]
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