The Australian Accounting Standards Board - Term Paper Example

RЕSЕАRСH BАSЕD САSЕ STUDY АND RЕРОRT Name: Course: Professor: University: City: Date: Table of Contents Research Based Case Study and Report Executive Summary The Australian Accounting Standards Board (AASB) is in charge of developing issues and maintaining the Australian Accounting standards pertaining to leasing (Godfrey & Chalmers 2007, P. 239). Recently the AASB 16 introduced a new accounting model that requires all lessees to consider all assets and liabilities within all leasing contracts within a scope of about 12 months. This suffices only if the assets under consideration are of low value. In the new rules, a lessee is required to determine their right to use various assets that represent their right to use any underlying leased asset as well as lease liability. The right to use assets is measured with correspondence to the other non-financial assets while the lease liability measured against the financial liabilities. Professionally, leasing defines a situation where a company decides to rent property that is owned by another party. It grants the lessee the free use of assets and guarantees the lessor constant payments according to the contract. Leases legally bind the company to the guarantor. Introduction Current Lease Agreements Altech Chemicals Limited is among the companies listed on ASX that produce high purity alumina at their manufacturing plan in Malaysia (ASX 2011). The 4,000tpa constructed and operational plant acquires its raw materials from Western Australia. Considering that HPA is the most popular material for creating scratch-resistant artificial sapphire glass used in modern smart phones, the company aims to be the worlds leading supplier of the product. Recently, the company announced its leasing agreement with Johor Corporation to occupy the 4Ha plot of land as an industrial complex. The agreement included a 30-year lease and a possibility of extension for a further 30 years (Malaysia 2016, para 2). In terms of payment, the land was acquired with initial payments, subsequent interim payments, and final payments due at the end of the year. Current Accounting Treatment Recognition In Malaysia, Johor Corporation is one of the major industries that companies seek to have an association. The business as a vibrant and industrial company is placed at the port with access to the international port in case of cargo (Malaysia 2016, para 1). In terms of assets and concentration of clients, Johor Corporation controls a number of assets for different companies as well as associates with popular brands in the electronic sector. Measurement With the significant economic and developmental factors present, the operating costs were expected to be much lower compared to the plants in Australia (Malaysia 2016, para 4). With the geographical advantage present in this case, it was evaluated that the cost would be approximately 40% lower than the normal costs in Australia. Presentation/Closure in Financial Statements The settlement is presented through forward-looking statements identified by words such as “anticipates” and “forecasts.” The previous performance of the leasing project shows significant indication of profits (Malaysia 2016, para 7). The assessment involves the known and unknown risks including the economy. Discussion New Rules Based on AASB 16 Leases In most cases, the assets and liabilities that pertain to any lease are calculated based on the present value. Therefore, it is important to record such values to avoid any miscalculations during drafting of the leasing agreement. The inclusive values take into account non-cancellable lease payments, payments made in optional periods and whether the lessee is able to extend or prematurely terminate the lease. The new rules as highlighted in the AASB 16 highlights the disclosure requirements that are required by any lessee. They set out the recognition principles, requirements, measurements and disclosure procedures pertaining leases. All entities in this supply chain sector are required to consider the terms and conditions of contracts and all the important elements before embarking on any lease dealings. The standard is available to contracts that possess similar characteristics. Although the AASB 16 covers most leasing contract, the new rules highlight a difference in terms of the contract rights of use in any sublease. For instance, the rules cannot be used in contract leases that tend to explore the use of the natural environment such as minerals, oil, natural gas and extinctive resources. Similarly, the rules argue against the lease of biological asset and components such as agricultural chemicals and buildings. The leasing condition regarding biological components is covered under the AASB 141 Agriculture rules. Furthermore, the AASB 16 rules apply to all concession agreements except those covered in the Service concession agreement. The standard AASB 16 lease applies to the aforementioned conditions for intangible assets except that of items such as video, audio, patents, manuscripts and stage plays. According to the AASB 16 rules, a lessee is given the right to use lease assets and liabilities. However, the various procedures of measurement apply. For instance, at the beginning of any lease, the lessee is required to measure their right to use assets. The cost of using assets will include the amount of the initial measured lease liability as per the recorded present values. Thereof, the lease payments will be calculated through interest rate method for ready values or the increment-borrowing rate. The measurements will also take into account the lease payments that have been made before the date of contract commencement subtracting any lease incentives that were received. The measurements will also include the direct costs that were incurred before the commencement date. Lease payments that may be made at the commencement of the lease date include fixed payments, variable cost and residual value guarantee. In some cases, a lease object is subjected to different modifications. Such modifications must be included in the contract, as it will affect the final value. Nonetheless, the lessee is accountable for any modification that increases the scope of lease by involving additional aspects of the lease apart from the previous assets (King 2016, para 5). Similarly, in case of increase in lease by an amount that corresponds with the stand-alone price of the lease, the lessee must account for such a measurement. However, if the measurement takes into account a lease modification that is unaccounted for during the commencement date, the lessee is required to remeasure the liability through using the discounting rate. In such a case, the lessee is liable and is required to decrease the carrying amount of the right to use assets and make the necessary changes to the right of use assets for any additional improvements. The AASB 16 also touches on issues that relate to the presentation and disclosure of a lease. In the case of lease presentation, a lessee is required to reflect the measurements in a statement of financial position. In this statement, the lessee will be required to issue a right of use assets separate from other assets. In case the lessee fails to provide this, they will be required to issue a statement where they include a similar instance where the assets lie to represent elements in that line. Nonetheless, they can disclose what types of assets are exempted from the right of use assets. For the right of use assets, the lessee is required to present an interest expense on the lease liability separate from the depreciation charge. In the disclosure, the lessee is required to give a comprehensive statement that takes into account the cash flows, the financial information and right of use assets. Reasons for Change from Accounting Standards AASB 117 Leases The lease requirements that applied in most companies under the AASB 117 did not take into account various factors. The AASB controllers determined that there was an increasing in the number of leasing companies as more people took up leasing as a way of acquiring and accumulating assets (Godfrey & Chalmers 2007, P. 238). Similarly, the AASB determined that as much as the commitments and leasing activities increased, there was no significant impact to the balance sheets. A change in the standards would create a significant difference between the operating leases and financial aspects of the lasing company. In such a case, the lessees will be able to account for the right to use assets and lease liability in their balance sheets for any leasing contract. Impact on Financial Position and Performance The various changes in the standard AASB 16 lease rules will adversely affect the financial position and performance of many Australian based companies (Holland 2016, para. 1). Capitalizing lease assets and liabilities is likely to cause a shift in the financial statements. In most companies, it is possible that the unrecorded lease assets and liabilities will increase compared to the total assets and long-term liabilities. The effect on capital lease will bring changes to the balance sheet in terms of recording a liability in the minimum lease payments (Johanson 2016, para 15). Equipments are often recorded as assets therefore, calculating the discounted measurements will be reduced values of the lessee incremental borrowing rate and the leaser-implied rate. The income statement may also provide extensive information regarding the effect of standard AASB 16 lease rules to the company. The interest expense and the principal payment are among the capital lease payments that are included in the financial income statement. In such cases, the interest in the financial statement will record a positive value after the commencement date as the payments continue. The leases do not affect the cash flow statement. Equity may be affected by the standard AASB 16 lease rules where the carrying amount of lease assets will reduce significantly more than the carrying amount of liabilities. The terms of lease, the lessee’s advantage and the ratio of liabilities to the equity dictate the impact of any lease. The holding portfolio in the lessee’s is likely to cause a little change in the profit or loss of most lessees. Conclusion Evaluating how Altech Chemicals Limited will incorporate the new accounting model is one recommendation that is required. The company needs to determine the initial recognition and measurements placing concentration on the contingent lease payments and the subsequent measurement policies (Harvey 2016, para 10). The presentation of the lease contract needs to be comprehensive and inclusive of all variables. The presentation should include elements such as the balance sheet, the income statement and the statement of cash flow. Adhering to the disclosure policies is a major recommendation where the lessee is required to provide any additional information to the lessor that may pertain to the contract. References Top of Form Top of Form Top of Form Top of Form Godfrey, J, M, & Chalmers, K 2007, Globalisation of accounting standards, Cheltenham, UK: Edward Elgar. Harvey, R 2016, Accounting standards to impact on leases, The Sydney Morning Herald. Available from: . [4 October 2016]. Holland, D 2016, IFRS 16 Leases - What does it mean for you? Moorestephens.com.au. Available from: . [20 September 2016]. Johanson, S 2016, Significant reaction expected to leases being recorded on balance sheets, The Sydney Morning Herald. Available from: . [4 October 2016]. King, A 2016, Lease accounting standards will shift debt back to companies, Financial Review. Available from: [4 October 2016]. Malaysia, I 2016, Altech Chemicals Ltd (ASX:ATC) Finalises Agreement for HPA Plant Site – Johor. Available from: [20 September 2016]. ASX, 2011, The official list, Available from: http://www.asx.com.au/asx/research/listedCompanies.do. [6 Oct. 2016]. Bottom of FTop of FormBottom ofBottom Bottom of FormBottom of FormBottom of FormBottom of Form Bottom of FBottom of FB Read More