Discuss About The Accounting Standards Board Is Governmental?
The Australian Accounting Standards Board is the governmental agency that is indulged into the practice of maintaining and developing financial reporting standards that apply to private and public companies operating in the Australian market. Various reporting standards have been introduced by AASB which highlights the various practices that businesses are required to comply with (Dakis 2016). It is mandatory for the companies to prepare financial reports and to comply with the guidelines. The platform developed by AASB has allowed facilitating interaction between the companies operating in the Australian market and the global economy. For the present sector Telecommunication sector has been chosen from the GISC list. Further, this sector is indulged into the practice of delivering communication service. The organization chosen is Telstra Corporation Ltd which is Australian telecommunication and media firm that builds and operates different networks along with mobile, voice and another form of products.
Why Leasing Standard Has Been Changed
Leasing standards have been changed where the main motive behind the same is that operational and more effective financial reporting will take place. Further, with the introduction of new standards more transparency will be possible to the lease obligations by taking into account, all leases onto the balance sheet (Bozzolan, Laghi & Mattei 2016). The main reason due to which lease requirement has been updated is that listed companies that are complying with International Accounting Standards Board have lease commitments of approx US $3.3 trillion out of which 85% are operating leases, and it has no such influence on the balance sheet.
Below are the main changes that have taken place
Impact on lessees
All the range of leases will be undertaken on ‘Balance sheet, ’ but it will not undertake leases of low value and short term.
Lease liability will not undertake options periods except exercise is reasonably certain and the overall contingent payments that are associated with the sale (Deloitte 2017).
Apart from this, influence on lessor is also very little as the current standards are minorly modified. New guidance has been introduced about the sale and leaseback accounting.
The main changes have been witnessed where there is no such difference in between operating and financial lease. Lessees will be granted right to use asset and lease liability onto their balance sheet for all the leases. Different type of operating leases are presently defined by AASB 117 leases, and they do not influence the balance sheet will be required to be capitalized on the balance sheet in case if IFRS 16 is adopted (Hodgson & Russell 2014). This will directly represent asset and liabilities on the company’s balance sheet and can influence bank covenants that involve Debt/Equity ratios.
Some advantages along with disadvantages are present that will influence the overall activities of the Telstra Corporation Ltd
- Detailed leasing information and broad array of report which takes into consideration fixed asset balance sheet, obligations analysis report
- It is possible to export any essential lease and asset information which is needed
- Overall the balance sheet prepared by business will be more transparent (Limijaya 2017)
- Quality of financial reporting is also main benefit as the assets of the business can be easily reflected along with the credit rating etc.
- The introduction of the new model will influence the business model of the lessors
- Businesses have to undergo training as they are not aware of the concept of AASB 16 and due to this reason proper information is required to be gathered so as to comply with the government practices.
Effect Of Aasb 16 On Chosen Stakeholder
AASB 16 will directly influence the financial statements prepared by Telstra Corporation Ltd.
Balance sheet: AASB 16 requires leases to be reported on the balance sheet which does not takes into consideration low-value assets along with the short term leases and this directly leads to rise in the lease assets where the right to use asset is granted and the liabilities. Lease liabilities will be reflected in the balance sheet of the company (Government 2017). Apart from this, lease assets will undertake the costs that are associated with entering into the lease.
Income statement: Considering the income statement of the business which takes into consideration all the income and expenses of Telstra Corporation Ltd. All the rental expenses associated with the business such as single expense charge to operating expense under the current accounting model will be replaced with depreciation charge on the lease assets and the different finance costs that are linked to the interest component of the lease liability (standard 2016). As per the new standard introduced by AASB 16 the implicit interest in the lease liability will be undertaken as a part of the financial cost. Further, the amortization of the lease asset will not be part of EBITDA. So, this will directly lead to the rise in EBITDA level (Holland 2016). The overall influence on profit before tax will rely on the different type of leases that are present with the business. It has been assumed that profit before tax will be low due to the presence of high-interest rate.
Cash flow statement: It takes into consideration the operating, investing and financing activities linked with the business management. The disclosure of principal payments associated with the lease payment is considered to be part of financing activity. Overall the nature of lease payment will be shown in the cash flow statement. It will involve the interest portion associated with the lease liability in accordance with the IAS 7 statement of cash flow requirement which is linked with the interest paid (Houqe 2017).
So, in this way, the introduction of AASB 16 will have the direct impact on the business operations, and it is required for Telstra Corporation Ltd to comply with the guidelines so that overall operations can be carried out as per the government guidelines.
Aasb 16 Would Result In Reporting
The AASB 16 standards introduced will surely improve the reporting practice and will provide more appropriate to the users of the financial statements. It will reflect the asset and liabilities of the business in appropriate that can allow stakeholders of Telstra Corporation Ltd to judge the financial performance of the business in the most effective manner. Apart from this, for the telecom industry businesses operating under this sector are required to unbundle multiple element arrangements that are provided to the customers (Standard 2016). The new system directly highlights the type of lease such as it may be capacity or service for a fiber optic cable. It is required for all the telecom companies to determine whether their lease provide control over the physically distinct portion of an asset.
For the customers, the standard has developed a single accounting standard which takes into consideration right of use asset along with the lease liability (Kober, Lee & Ng 2013). All the telecom companies operating in the market are required to consider whether the addition of lease liabilities must be undertaken at the time of determining the level of debt obligations. In short, the overall reporting with the introduction of the new standard will take place in the better manner. It is easy to determine the overall position of the business by analyzing the balance sheet, income statement and the profit and loss account (Sinclair & Ridley 2016). Along with this, the major costs of the business can be known. It is beneficial for the investors also where they can easily take the investment decision.
Discussion For Ceo
The new standard introduced AASB 16 is a new single lessee accounting model, and it is required for the lessee to consider the key assets and liabilities. Further, the lessee is required recognize the right of use asset that clearly indicates that leased asset can be easily used. It is possible to measure all the assets and liabilities of the business in the proper manner. AASB 16 takes into consideration all the disclosure requirements for lessees. The main reason due to which this standard has been issued by the regulatory authority is that leasing is one of the most crucial activities of every enterprise (KPMG 2016). With the introduction of new approach associated with the lease accounting, it is required for the lessee to recognize assets and liabilities. Another key objective is that both lesser and lessors can provide relevant and true information that clearly indicates the business transactions. Further, it is a well-known fact that every business is required to share true financial information so that users or stakeholders of the business can take decisions by same. In case if the true information is not published then it can have an adverse impact on the company.
The entire study carried out has supported in knowing about the AASB 16 standard introduced along with the key impact that it will have on the business. Further, it has influenced various industries such as healthcare, telecom, information technology, metal, and mining, etc. The main motive due to which leasing standards have been changed is that more accurate reporting of the financial information can take place and the users of the information can take decisions accordingly. Apart from this, it will have an impact on both lessor and lessee. In short, it acts as both advantage and disadvantage to the business.
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