Impact Of AASB 16 And AASB 15 On Financial Reporting And Accounting Policies

AASB 16 and its Impact on Financial Reporting

Requirement 1

AASB 16 brings with itself single lessee accounting model and requires a lessee to recognize all the assets and liabilities of the leases which have a time period of more than 12 months. If the underlying asset is of low value, then there is no need to recognize it. This new standard brings many changes in lease accounting used by many companies. Specifically, the lessee accounting changes to a great extent and minor changes were there in the books of lessor. As per this, organizations are required to report all the financial and operating leases on their balance sheet. This affected total assets, liabilities and equity to a great extent (KPMG. 2017).

Total assets

AASB 16 requires companies to report all the liabilities and supported assets which are related to operating leases with a period of more than 12 months. Due to this change in accounting, the assets of the company rise. It will be shown on its balance sheet.

Total liabilities

The same impact will be there on the total liabilities of a company. As per the new lease standard companies have to report off balance sheet leases which includes operating leases. Such treatment will increase the liabilities of a company.

Total equity

There is no significant change on the value of company’s equity but overall the enterprise value will change. In addition to this, some financial metrics will also get impacted.

Overall, AASB 16 will definitely impact the balance sheet if lessee and increase its total assets and liabilities, keeping the equity same. Due to such changes, EBITDA of the company will also increase.

Requirement 2

A revised conceptual framework is been published by International Accounting Standard Board (IASB) which include revised definition of assets and liabilities. It also gives new guidance on recognition, presentation and disclosure. The updated framework includes all the topics which are not yet covered before (Iasplus.com. 2018).

According to the framework, the assets are defined as the present economic resource owned by an enterprise, as a result of past event. In other words, it is a resource which has a potential to generate economic benefits. Liabilities are defined as a present obligation of an enterprise which requires a transfer of an economic resource as a result of past events (Iasplus.com. 2018). The new lease standard provides all the type of leases to be recorded on the balance sheet. Such leases include some assets and liabilities which have occurred from the past events. Also as per the framework, proper disclosure of every transaction is must. AASB 16 requires companies to do the same by reporting all the lease associated liabilities and assets on the balance sheet. So it can be said that, new approach is consistent with the definitions of assets and liabilities given by the conceptual framework of IASB.

Revised Conceptual Framework and its Alignment with AASB 16 and 15

Part B

Requirement 1

According to AASB 15, standard on Revenue Recognition, Revenue is recognised for the amount the company is to be entitled. There is a transfer of goods or services to a customer for that particular amount. Depending upon the requirements of meeting the criteria, the revenue is recognised either over time or at a point of time. The five step model is applied to determine the when to recognise and at what time.  First the contract needs to be identified, identify the performance obligations, determine the price of the transactions, after determining the allocation of the prices of the transactions is done and lastly the revenue is recognised.

AASB15 affect the organisation can be very, but the new revenue standard also presents the different opportunities. The standard’s impact has a great magnitude, only after the company commences its introduction.

Organisations do need to take into account the following points.

• Timing of recognition and amount of revenue recognised may change.
• Changes to systems are also required
• Extensive new disclosures will also be necessary.

As per revenue recognition policy of the Microsoft company revenue for retail packaged products and the products for which the license is obtained is generally recognised when the products are shipped or made available. Revenue is recognised when persuasive evidence of arrangement exists, delivery has occurred, the fee is of fixed nature and where the collectability is probable.  Revenue related to the games when published by the third parties is recognised when the games are manufactured by the publishers of the game (Microsoft.com.2013).

Requirement 2

Positive accounting theory is the one which deals with estimating the actions such as choices of accounting policies by companies and how they respond to the new accounting standard. It helps in predicting the facts that management of a company will use while making their accounting policies. The theory consists of three hypothesis named as bonus plan, debt covenant and political cost hypothesis (Humayun, 2011).

The debt covenant hypothesis says that if a firm is closer to violating its debt covenant, then the firm manager will more likely to select the accounting policies and procedures that will shift the reported earnings from future time period to current period. In addition to this, the hypothesis also stated that by increasing the firm current earnings, the company will less violate its debt covenants (Humayun, 2011).

The same is been observed in case of Microsoft. Earlier the company recognized 25% of its revenue from its Windows software. However, with a launch of Vista 2008, the company policy of revenue recognition changes and it stared recording its revenue in the period the product was sold. As a result of which Microsoft earnings increased by 65%. This decision of changing the policy let the company to shift their earning in current period and also raises its income. This resulted in less violation of debt covenants and was an appropriate decision taken by the management in terms of debt hypothesis. The decision completely follows the hypothesis which in a way led the company to succeed and grow.

Part-C

Requirement-1

Trial Balance of NewSpace Ltd as at  30 June 2018
		$’000
Accounts	Debit	Credit
Sales		2,444.00
Cost of sales	1,212.00
Interest income		5.00
Sales and distribution expenses	660.00
Administration charges	100.00
Interest expense	30.00
Income tax expense	130.00
Cash on hand	51.00
Cash on deposit, at call	10.00
Trade debtors	150.00
Allowance for doubtful debts		14.00
Other debtors	50.00
Inventory	401.00
Financial assets held for trading	101.00
Land and buildings	135.00
Accumulated depreciation – buildings		22.00
Plant and equipment	210.00
Accumulated depreciation – plant and equipment		45.00
Patents	15.00
Amortization of patents		2.00
Bank loans		32.00
Other loans		231.00
Trade creditors		132.00
Provision for employee benefits		54.00
Warranty provision		31.00
Current tax payable		12.00
Land revaluation surplus, net of tax		33.00
Share Capital, 30 June 2017		186.00
Retained earnings, 30 June 2017		25.00
Miscellaneous adjustment	13.00
	3,268.00	3,268.00

Requirement-2

Statement of Comprehensive Income NewSpace Ltd
For the year 2018
Particulars	Notes	Amount ($)
Revenues	2	2,444.00
Other income		5.00
Total		2,449.00
Cost of goods sold		1,212.00
Gross profit		1,237.00
Operating expenses
Sales and distribution expenses	3	660.00
Administration charges		100.00
Operating profit		477.00
Finance cost		30.00
Profit before income tax		447.00
Income tax expense		130.00
Profit after tax from continuing operations		317.00
Basic (loss)/earnings per ordinary share (cents)		3.41
Dividends per ordinary share – determined in respect of the period (cents)		0.6344

Requirement-3

Statement of Changes in equity: NewSpace Ltd
	Issued share capital	Land & building revaluation reserve	Retained earnings
Beginning balance on 01.04.2017	140.00	–	25.00
Add: Shares issued in 2017	46.00
Add: Upward revaluation of land and building in 2017		33.00
Add: Profit of 2017			317.00
Total	186.00	33.00	342.00

Requirement-4

Balance sheet of NewSpace Ltd
For the year ended on 31st march 2018
Particulars	Notes	Amount ($)
Assets
Current assets
Inventory		401.00
Accounts receivables	4	186.00
Cash and cash equivalents	5	61.00
Current investment	6	101.00
Other assets		13.00
Total		762.00
Non-current assets
Property, plant and equipment	7	278.00
Intangible	7	13.00
Total		291.00
Total assets		1,053.00
Liabilities
Current liabilities
Borrowings	8	22.00
Accounts payable		132.00
Short term provisions	9	97.00
Total		251.00
Non Current liabilities
Borrowings	8	241.00
Total liabilities		492.00
Equity
Issued share capital		186.00
Land & building revaluation reserve		33.00
Retained earnings		342.00
Total		561.00
Total equity and liability		1,053.00

References

Humayun, K. (2011). Positive Accounting Theory and Science. [Online]. Available at: https://www.researchgate.net/profile/Humayun_Kabir14/publication/228118770_Positive_Accounting_Theory_and_Science/links/59ebc8a04585151983cb769a/Positive-Accounting-Theory-and-Science.pdf?origin=publication_detail [Accessed on 21 May 2018].  

KPMG. (2017). AASB 16 Leases. [Online] Available at: https://assets.kpmg.com/content/dam/kpmg/au/pdf/2017/aasb-16-fundamental-overhaul-lessee-accounting.pdf  [Accessed 21 May 2018].

Microsoft.com. (2013). Accounting Policies. [Online] Available at: https://www.microsoft.com/investor/reports/ar13/financial-review/notes/index.html [Accessed 21 May 2018].

Iasplus.com. (2018). IASB publishes revised Conceptual Framework. [Online] Available at: https://www.iasplus.com/en/news/2018/03/cf[Accessed 21 May 2018].