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This task requires you to prepare a report to evaluate and comment on information regarding leases provided in the annual report of a company listed on the Australian Stock Exchange (ASX). Your comments or evaluation should comply with the requirements of relevant Australian accounting standards (AASBs).
PWC states that 'The new requirements (of IFRS 16) eliminate nearly all off balance sheet accounting for lessees and redefine many commonly used financial metrics such as the gearing ratio and EBITDA. This will increase comparability, but may also affect covenants, credit ratings, borrowing costs and your stakeholders' perception of you.'
AASB 16 Leases was released in February 2016 in Australia. In this report, you should address the points outlined below:
1) Discuss the recognition criteria for a lease according to relevant AASBs.
2) Identify the differences between finance lease and operating lease.
3) Identify at least one example of a finance lease and an operating lease reported in the annual report of the chosen company.
From the perspective of the lessees, discuss the potential implication of the adoption of new AASB 16 Leases on assets, liabilities and debts, leverage, accounting-based debt covenants, expenses and profit of the chosen company. You should include the examples that you
identified in part A3) in your discussion.
Further information regarding the report:
The report should include an executive summary, a body of contents covering points listed above, and a reference list. You should refer to the requirements of AASB 16 Leases, AASB 110 Presentation of Financial Statements and AASB Conceptual Framework as the guidelines of your report. Other references used in the report such as annual report should be included in the reference list. Remember to provide a link of the annual report in the reference list.
Sections extracted from the annual report or AASB to support your report should be included in the Appendix. Also, provide specific page numbers of the annual report and paragraph numbers of AASBs as in-text reference in your report such as annual report note 10 and AASB 101.26. If you choose to ignore this instruction, you will lose marks.
The quality of the report will be assessed based on the following four areas:
1) Demonstrate and identify the accounting concepts applied.
2) Use paragraphs from related Australian Accounting Standard as guidelines to support your discussion.
3) Provide example(s) from the annual report to illustrate the implementation of an accounting concept(s) or principle(s) discussed.
4) Demonstrate effective communication, referencing, logical presentation and integrated evaluation.
AASB 16 provides for lease accounting in companies and has been issued in replacement of AASB 117. The new lease standard has introduced one model of lease accounting in the books of lessee whereas in the books of lessor it is still two way model. The present report identifies the recognition criterion of lease as per the new standard. It also makes distinction between two types of lease which are operating lease and finance lease. The analysis of annual report of Newcrest Ltd for 2016 has been made to find out the operating lease and finance lease existing in their books. Newcrest Ltd is a gold mining company and is listed in Australia. The report concludes that AASB 16 will have impact upon the income statement, balance sheet, leverage and debt covenants of the company.
Lease – Recognition Criterion
AASB 117 has been replaced by AASB 16 which relates to lease accounting. The new standard has changed the manner the leases are accounted for in the books of lessee whereas the treatment of lease in the books of lessor is same as done according to the earlier standard (AASB page 5).
Recognition criteria for lessee
AASB 16 prescribes that the all lease should be accounted as asset and liability in the balance sheet by lessee except for the leases which are for short duration of time or less than twelve month or which are of very low value (AASB 16.5). It has abolished the operating and finance lease concept for lessee. It states that the lessee should show right of use asset on the asset side of its statement of financial position at its fair value (AASB 16.22). The similar lease will be accounted for as a liability also at a value which will be equal to future value of rental payments (AASB 16.22).
As far as the lessor is concerned, the recognition criterion for him is same as per the AASB 16. In his books lease will be recognized either as operating lease or finance lease depending on the transfer of associated risks and returns related to the assets leased (AASB, 16.61).