22420 | Accounting Policies Related to the AASB117 Leases

This Standard aims to prescribe for lessees as well as for lessors, the suitable accounting disclosures and protocols are to be applicable in relation to the leases. This standard is applicable to the each business entity that is needed to maintain the financial reports as per the Part 2M.3 of the Corporations Act i.e., the reporting business entity, and the common purpose financial statement of every reporting business entity and financial statement that are acquired to be common financial statements (Barone, Birt and Moya, 2014). The AASB 117 needs a lease to be categorized as operating or financial leases. Further, the amendments made to the AASB 117 taking place from the AASB 2009-5 needs business entities to re-consider the categorization of land components of all the current leases, and consider the new land leases to identify if or if not they are in the operating or finance lease nature.

Part B

Summary of the Proposed accounting policies related to the AASB116leases of premises

The Australian Accounting Standards Board (AASB) expands issue and upholds the Accounting Standards of Australia. Moreover, it includes interpretations.

AASB 16 Leases that is very efficient for an accounting of leases of premises which is applicable on or after 1 January 2019 (i.e. 31 December 2019 or 30 June 2020 year ends). Introduction of this standard will modify the accounting method and needs of the mainstream of leases supposed by lessees and the manner to be mentioned on the balance sheet records (Barone, Birt and Moya, 2014). Lessor accounting is considerably unaffected, and lessors mostly carry on categorizing their leases as functioning or economics.

AASB 16 established a solo lease accounting technique and need a lessee to identify assets and liabilities for all leases for the period of more than 12 months, except the fundamental asset is of low value (Wong and Joshi, 2015). A lessee is obligatory to know a right-of-use asset by expressing its right to utilize the original leased asset and a lease liability demonstrating its compulsion to construct lease expenses.

In the proposed method, Direct financing leases in which lessors categorized the lease as a direct financingLease, the lessor should identify the value of premise at the commencement of the lease term (Barone, Birt and Moya, 2014). Value of an asset (lease receivable) is determined at an amount equivalent to the cumulative of the present worth of the minimum lease expenditures and the present value of some-guaranteed outstanding value foreseeable to accumulate to the advantage of the lessor at the end of the Lease period.

Part C

Impact of changes

This amendment has made considerable changes in the requirement of lessee accounting and less modification in terms of lessor accounting. Changes held in the lease accounting standard have a wide-reaching effect on the process of lessees business, system and controls. Further, the lessees will need a higher amount of data across the leases than before given on the balance sheet accounting for most of the leases (Joubert, Garvie and Parle, 2017). Companies will be required a cross-functional aspect to implementation, not mere accounting.

By considering the annual report of the company, provisions of AASB 117 has already complied with the company with the application of standards the financial statement of the company has been affected in the following manner; the company announced the decision to not to renew the leases Hornsby, Belconnen and Colonnades (Annual Report of Myer, 2017). The Group has been able to realize a $9.1 million arduous lease provision regarding the additional surplus space regarding the space determined. This provision expense is on a partial basis balanced by the write-back in regards to space. In addition, the impairment related to the assets linked with store closures, distribution centres and office difficult lease provision. Further, the lease rights are done amortization over the lease term along with any renewal options rationally to be used during acquisition of the lease rights (Xu, Davidson and Cheong, 2017). As per the AASB 117 Lease, the full rentals on these leases are expenditure on the lease term in the basis of straight line. This provision shows the variation among the future-oriented payments as per these leases and the full future expenditures (Barone, Birt and Moya, 2014). On the basis of this provision related for support office onerous lease realized at the time of period, a part of this provision is written-off to show the reunited future expenditure having the expectancy on the left lease term. Various lease contracts meant for stores inclusive of the cash contributions given by the lessor related to the fit-outs and known to as a lease contribution (Annual Report of Myer, 2017). The AASB 16 Lessees was introduced in the year 2016, by the AASB, this standard alleviates the categorization among operating as well as finance leases and releases a singular accounting model (Chambers, Dooley and Finger, 2015). The reformed model needs the leased asset recognition, and its related lease liability, held for each and every lease that have an aspect of higher than 12 months and the single realization of the depreciation charge held on the asset which is leased from the interest expenditure on the leasing liability. Thus, the adoption of AASB 16 is likely to have a materialistic effect on the consolidated financial statement of the Group at the transition in upcoming years to the degree that leases presently categorized as operating leases will require to be taken on the balance sheet (Wong, Wong and Jeter, 2016).

Part D

Potential economic consequences of change in accounting standard

Costs and benefits related to the economic can be considered from the perceptions of the statement users and preparers. As per the proposed standard, leases capitalization has considerable effects on the reported numbers of accounting; it will impact the contracts amid managers as well as stakeholders (Dakis, 2016). Further, this assumption is believed by the aspect that the lease capitalization improvises the chances of infringing the debt covenants. Further, it will require changes in disclosures method for lease accounting by the companies on which accounting standard of the lease is applicable. Further, the same is to be reflected in the financial statements of the company supported by appropriate disclosures.

References

Annual Report of Myer, 2017. [pdf]. Available from <https://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA/file/Myer_Annual_Report_2017.pdf>. [Accessed on 18 September 2018].

Barone, E., Birt, J. and Moya, S., 2014. Lease accounting: A review of recent literature. Accounting in Europe, 11(1), pp.35-54.

Chambers, D., Dooley, J. and Finger, C.A., 2015. Preparing for the looming changes in lease accounting. The CPA Journal, 85(1), p.38.

Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance Directions, 68(2), p.99.

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).

Morris, R.D., 2017. Discussion of: The Phoenix Rises: The Australian Accounting Standards Board and IFRS Adoption. Journal of International Accounting Research, 16(2), pp.155-157.

Wong, J., Wong, N. and Jeter, D.C., 2016. The Economics of Accounting for Property Leases. Accounting Horizons, 30(2), pp.239-254.

Wong, K. and Joshi, M., 2015. The impact of lease capitalization on financial statements and key ratios: Evidence from Australia. Australasian Accounting, Business and Finance Journal, 9(3), pp.27-44.

Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating to capitalised leases. Pacific Accounting Review, 29(1), pp.34-54.