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CRITICAL THINKING
Assume that your class team has been assigned to the AASB 16 Transition project in a ASX500 listed company that heavily relies on operating leases at the moment. At present, it does not disclose any lease obligations on its balance sheet (as allowed under AASB 117).
Required
Using the AREA framework to prepare for the meeting with your class team, identify and discuss the effects of the release of IFRS 16 and subsequently AASB 16 for the company (Analyse & Research). In class, work out a strategy with your team for preparing the company for lease reporting under AASB 16. You may make any assumptions about the company, as you see fit (Evaluate & Answer).
ANALYSE (30 – 50 words)
Identify the issue and why it matters. Determine what you need to find out.
RESEARCH (300 words)
Discuss relevant facts and evidence, or issues.
EVALUATE & ANSWER (50 – 100 words)
Provide your opinion based on your discussion of relevant facts, evidence, or issues.
Expert Answer
ANALYSE (30 – 50 words)
Identify the issue and why it matters. Determine what you need to find out.
Answer:
AASB 16 standard mandates all lessee’s to account all right-to-use and lease liabilities on their balance sheets, which essentially means that the operating leases, which do not impact the balance sheet will be required to be expensed.
RESEARCH (300 words)
Discuss relevant facts and evidence, or issues.
Answer:
GAAP Consulting released a special report in March 2016 explaining AASB 16 and its impacts on financial reports. AASB 16 no longer differentiates ‘operating’ or ‘finance’ lease model.
Effective 2019, the new leases standard – AASB 16 (IFRS 16) – requires companies to bring the majority of operating leases on-balance sheet. Property and equipment leases previously recognized off-balance sheet will be accounted for as a right-of-use (ROU) asset and lease liability which will bring more transparency about a company’s lease commitments and change key financial metrics such as gearing ratios, asset turnover and EBITDA. Lessor accounting will be largely unchanged from the current leases standard, AASB 117 (IAS 17).
Implementation of the new leases standard is expected to pose financial and operational challenges beyond financial reporting. Not only will systems, processes and controls have to be modified to ensure complete and accurate capture of leasing data and judgments, but companies will have to assess and manage the impacts to, for example, debt covenants, credit ratings, leasing strategy, impairment testing and tax-effected accounting. Companies should not underestimate the effort, time and cost required to implement these changes.
