The New Accounting Standard Ifrs 16 On Leases, Profit And Loss And Balance Sheet

The Case Study analysis will be based on the company Meridian Energy Limited(MEL). Meridian is leading manufacturer of renewable electricity and its customers are from all over Australia and New Zealand. The company is largest electricity generator and is the major contributor to the government’s target of renewable energy generation (Meridian, 2016). The objective of the case study is to critically analyse the application conceptual framework of accounting and also the accounting standards that relate to them. The case studies focus will be on the Statement of changes in Equity. Also the focus will be on the extent of application judgement and estimates that have been made by MEL and the issues which may arise because of these estimates.

The reason we want to capitalise the lease commitments is that reporting under operating assets leads to substantial amounts of off-balance-sheet assets and liabilities. Hence, it is difficult to compare financial statements between two similar companies but use different accounting methods for essentially the same transaction.

From the above classification we can see that all the points indicate that the leases undertaken by David Jones Ltd as a Lessee are Operating Leases or Finance leases and can be determined using the steps above. Being such a big company, David Jones Ltd has both Operating and Financial leases and they are taken mainly to run the firm’s stores and warehouses. Under the annual report for the half year ended 2013 it is clearly evident that the cost of leasing activities for David Jones Ltd has increased by 4.17mn. “Payments made under operating leases, where the lease agreement includes predetermined fixed rate increases, are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease. Other operating lease payments are expensed as incurred. Lease incentives received are recognised in the Statement of Comprehensive Income as an integral part of the total lease expense and spread over the lease term.”

At the lease commencement, finance leases are capitalised at the fair value of the leased property, otherwise the present value of the minimum lease payments if lower (MHI, 2014). Other short term and long term payables include the relevant rental obligations and net of finance charges (MHI, 2014). Every lease payment is apportioned between the liability and finance charges (MHI, 2014). The finance cost is indicated in the comprehensive income statement for the lease period as well as to generate a constant periodic rate of interest on the remaining balance of the liability for each period (MHI, 2014). During the lease term, the depreciation is considered for the useful life of the asset such as the property, plant and equipment assigned under finance leases (MHI, 2014). The portion of the risks and rewards of ownership are persevered by the lessor are categorized as operating leases for leases (MHI, 2014). For the period of the lease, all payments made under operating leases less any incentives from lessor are indicated in the comprehensive income statement on a straight-line basis (MHI,

Wide range of entities will be impacted by the introduction of AASB 15, especially in the industry of construction, manufacturing, telecommunications and real estate (Moore Stephens Australia, 2015). While Deloitte (2016) stated that many companies may face a challenging implementation as AASB could not only impact an organisation’s financial reporting, but also may have changes to existing processes, internal controls and other business elements. For Lend lease, many impacts might be arisen on transaction as it is a construction company. The first one can be concluded that by adopting AASB 15, construction companies like Lend lease can bring revenue forward. An example of AASB 15 may result in revenue being recognised earlier than existing accounting standard is where the construction contract includes an award bonus. AASB 15 will include the bonus from the

David Jones does not included leases as part of their intangible assets but Myer does. This shows the different ways of recording accounting record between its competitors, and managers have an incentive to determine on the choice of recording items. This reflects business operation reflecting in its underlying business reality. Therefore, manager has higher chance to manipulate the accounting

1. How well do the chief accountant’s assumed lease characteristics line up with the company’s past lease term experience?

Since 2002, Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) have been working toward “convergence” of US General Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). They have made significant progress in efforts to converge critical accounting standards such as those dealing with revenue recognition, financial instruments and leases. Once these projects are complete, the "era" of convergence will be at an end. Nevertheless, the benefits for investors of eventually getting to consistently applied, high-quality, globally accepted accounting

One of the major differences between FASB and IFRS for leases standard is that IFRS uses a single model while FASB retains two models in terms of capital leases and operating leases (Katz). In this sense, U.S. companies need to account for leases in accordance with the classification of the lease. Under IFRS, all leases are treated as capital leases, and the operating leases were eliminated (IFRS). Lessees would recognize right of ROU assets and contractual obligations on the balance sheet with the present value of inevitable lease payments. Depreciation expense of ROU assets need to be separately recognized from interest expense on lease liabilities (Haywood). On the contrary, FASB upholds the division between operating and capital leases, but removes the bright line requirements. Lessees would account for capital leases as for the IASB model, and recognize a single lease expense for operating leases via a straight line approach.

The purpose of this paper is to examine and discuss ASC 840 Leases specifically Capital, Operating and Sale-Leaseback summarizing the essential components of the standard including recognition, measurement, subsequent measurement, financial, political, and economic impact for the company and its investors.

Different operating and accounting practices misrepresent comparisons. Different firms employ operating leases to different extents, and this could distort comparisons of profitability ratios, asset turnovers, leverage levels, etc. Similarly, differing practices regarding inventory values, depreciation methods, and provisions for doubtful accounts receivable could also invalidate comparisons. For example, Garden State’s debt ratio in 1992 is almost 60 percent. However, if the firm has obtained significant amounts of equipment through the use of operating leases, or if it had factored all of its receivables, then its true debt ratio would have been substantially higher.

In 2014, the operating lease receivable due within one year is 694.2 million, 28.9% growth based on 2013’s amount. While total current asset of the Group of 2014 is 1119.5 million, the operating lease receivable counts for more than half of its current asset. This explains it that the business is focusing on retail shopping centres, all the property owned and leased by the Group is leased to third party retailer for profits. Therefore, the growth in operating lease receivable reflects that the business is growing. It could be a result from the merge

Retail industry is thought to be most affected industry from changes in accounting for leases. At the moment most of the retail leases in the company are treated as operating lease. Changes in the lease treatment means retail companies will no longer be able to expense those leases rather have to capitalise it on balance sheet as asset and liability. Retailers like 7 eleven will book a “right-of-use” (ROU) in assets and present value of future lease payments in liabilities, inflating both the sides of the balance sheet. The income statement will change in terms of the way expense will be recognised and their timing each year. (PWC, september 2015)

According to Steve Collings (2010), the accounting treatment of leases has presented a lot of problems over the years for the particular profession. Problems are observed in the way some leases are being treated in a business’ income statement and statement of financial position. Although, as we are going to expand more on that, the major problem of accounting for leases according to Collings (2010), is the manipulation of financial statements by incorrectly categorizing ‘finance leases’ as ‘operating leases’. The main purpose of the essay is to discuss why accounting for leases has been so controversial and whether the new standard (IFRS16) will give a more meaningful picture of companies’ financial position for lessees.

This course builds on the foundation established in the Level I Financial Accounting courses and the Level II Intermediate Accounting course, ACCT 2014 Financial Accounting I.