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Advance Financial Accounting - Australian Accounting Standards Setting Board, AASB 16 - Report Writing Assessment Answer
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Internal Code: 1AGCAJ
Advance Financial Accounting AASB 16 Assessment Answer
Assignment Task:Advance Financial Accounting -
Advanced Accounting Assignment This assignment is based on the AASB 16 Leases. This Standard is applicable to annual reporting periods beginning on or after 1 January 2019 (see paragraph C1). Earlier application is permitted for entities that apply AASB 15 Revenue from Contracts with Customers at or before the date of initial application of this Standard. Copy of the standard is also available from the AASB website, According to Australian Accounting Standards Setting Board, AASB 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments. A lessee measures right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities. As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability, and also classifies cash repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows applying AASB 107 Statement of Cash Flows. Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. AASB 16 contains disclosure requirements for lessees. Lessees will need to apply judgement in deciding upon the information to disclose to meet the objective of providing a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee. AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. AASB 16 also requires enhanced disclosures to be provided by lessors that will improve information disclosed about a lessor’s risk exposure, particularly to residual value risk. Leasing is an important activity for many entities. It is a means of gaining access to assets, of obtaining finance and of reducing an entity’s exposure to the risks of asset ownership. The prevalence of leasing means that it is important that users of financial statements have a complete and understandable picture of an entity’s leasing activities. The previous accounting model for leases required lessees and lessors to classify their leases as either finances leases or operating leases and account for those two types of leases differently. That model was criticised for failing to meet the needs of users of financial statements because it did not always provide a faithful representation of leasing transactions. In particular, it did not require lessees to recognise assets and liabilities arising from operating leases. Accordingly, the International Accounting Standards Board (IASB) and the US national standard-setter, the Financial Accounting Standards Board (FASB), initiated a joint project to develop a new approach to lease accounting that requires a lessee to recognise assets and liabilities for the rights and obligations created by leases. This approach will result in a more faithful representation of a lessee’s assets and liabilities and, together with enhanced disclosures, will provide greater transparency of a lessee’s financial leverage and capital employed. Requirements: AASB 16 was released in February 2016 and is applicable to annual reporting periods beginning on or after 1 January 2019. Assume that the Chief Executive Officer (CEO) of an investment company from United Kingdom (UK) had approached you at KPMG seeking advice on the effects of AASB16 on Woolworths Group Limited and Wesfarmers Limited financial statements for the period 2017/2018 if these firms adopt the new leasing standard early. You are to assume that all aspects of the financial statement will be the same as 2016/2017 except the effect of the AASB 16. KPMG is the Auditors for Woolworths Group Limited for the financial year 2017/2018. You are required to take the role of business advisor/Analyst for the purpose of providing a detailed report based on the following specific questions relating to AASB 16 that the investing company is seeking a report for. As an advisor/Analyst at KPMG, write a report addressing the following questions that the CEO of the investment company has asked your firm for advice;- As an Auditor for Woolworths Group Limited financial year are there regulation, restrictions or disclosure requirements etc. that has implications for your firm if you provide the requested advice. If so, please discuss the requirement and how you would resolve it.
- Why has the leasing standard been changed? What will change? What does it mean for Woolworths Group and Wesfarmers? And how AASB 16 would benefit and/or disadvantage both?
- What effect does AASB 16 has on Woolworth Group and Wesfarmer’s income statement, balance sheet and cash flow statement? What does it mean for users of both corporations Australia’s financial statements? (Note: Compare and discuss relevant ratios where applicable. Use 2018 Annual Report for both Woolworths Group and Wesfarmers for comparison. Attach as Appendix 1 extract from the financial statements that you have used. Compare and discuss ratios in the body of your discussion and attach your ratio calculations including any formula for both companies in appendix 2.
- How have these two companies reported their environmental and social aspects such energy use and efficiency, carbon emissions, etc.? Is there any regulatory requirement for such reporting? If so, summarise the requirements and discuss what they have reported? If there is no regulatory requirement, is there any evidence that these mining companies have reported/disclosed any environments and social information if so, summarise how and what is reported/disclosed?
- Evaluate whether overall, AASB 16 would result in reporting that would be more useful to users of Woolworths Group Limited and Wesfarmers Limited financial statements?
- Summarise your discussion for the Chief Executive Officer (CEO) of the investment company who is from a non-accounting background.
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