Fatp Research Assigment

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With regards to key ratios it is important to understand the effects of AASB 16 which are mainly a higher asset base, higher financial liabilities and higher operating profit. Keeping that in mind, leverage (liabilities/equity) which is usually use to measure long term solvency would increase because financial liabilities are higher and equity is expected to decrease. Current ratio (current assets/current liabilities) which is used to measure liquidity would decrease because current lease liabilities increase while current assets do not. Asset turnover (Sales/Total assets) which measure profitability would decrease because lease assets will be recognized as part of total assets. Earnings per share (Profit/Number of shares) would be dependent on the effect on profit or loss which depends on the characteristics of the lease portfolio and the effects on tax. Return on equity (Profit/Equity) would be higher since reported equity will increase. (Sinclair, 2016)

- Outline the theoretical benefits and problems of the new standard compared to the old standard for Australian companies. (3 marks)

With the implementation of AASB 16, new benefits and problems would surface. One of the new key benefits that is identified would be that with the new standard will significantly improve the comparability of financial information between companies. Companies would have to develop tools for monitoring leases enabling the centralization of lease agreements and the assessment of their characteristics, in particular the probable lease term. This is due to several reason such as, companies will have to recognize assets and liabilities for all leases, measure all lease assets and all lease liabilities in the same manner and recognize only the rights that are obtained, and the liabilities that are incurred, through a lease. AASB 16 is also expected to reduce the need for investors and analysts to make adjustments to amounts reported on a lessee’s balance sheet and income statement. Investors and analysts would benefit as the information that is provided to them would be more streamlined and thus allowing them to produce more accurate decisions. (Sinclair, 2016)

Another key benefit would be the significant improvement in quality of financial reporting. Previously, under AASB 117, when it comes to investment decisions, some investors adjusted for off balance sheet leases whereas others did not. AASB 16 is expected to reduce the need for those using financial statements to make adjustments by providing a richer and accurate set of information, providing further insight into a company’s operations and funding. Companies would also reduce the need to provide “non-GAAP” information about leases. This in turn create a more level playing field in providing transparent information about leases to all market participants. (IFRS, 2016)

The problems that have been identified mainly include the implementation costs of the new system. Implementation costs include setting up systems and processes, educating staff, determining the discount rates used to measure lease assets and liabilities on a present value basis and to communicate changes to external parties. The bulk of implementation costs would fall under the re-measurement of least assets and liabilities to reflect changes to lease payments linked to inflation ("Leases”, 2016). However it is important to take note that the significance of implementation costs depends on the size of a company’s lease portfolio, the terms and conditions of those leases and the systems that are already in place to account for the lease under the previous accounting standard. A company with less sophisticated systems in place to manage and track lease are expected to incur more significant costs than companies that have sophisticated systems.

References

Olde, Martin. "Leases". Nexia.com.au. N.p., 2016. Web. 18 May 2016.

Mucking, Tom"New Leases Standard Requires Virtually All Leases To Be Capitalised On The Balance Sheet - BDO". Bdo.com.au. N.p., 2016. Web. 18 May 2016.

"IFRS 16 — Leases". Iasplus.com. N.p., 2016. Web. 18 May 2016.

Holland, Kevin. "IFRS 16 Leases - What Does It Mean For You? — Moore Stephens". Moorestephens.com.au. N.p., 2016. Web. 19 May 2016.

"Leases". Charteredaccountants.com.au. N.p., 2016. Web. 19 May 2016.

Sinclair, Sonya. "GAAP: Home". Gaap.com.au. N.p., 2016. Web. 19 May 2016.