Review Lease accounting standards will shift debt back to companies byAgnes King
https://www.afr.com/business/accounting/new-accounting-standards-will-shift-debt-back-to-companies-20160113-gm4xqm
Companies which have extensive property or equipment leases including airlines and miners are facing new administrative costs after the introduction of long awaited new lease accounting rules.The rules will transfer billions of dollars’ worth of debt liabilities onto the balance sheet of groups like Virgin, Qantas, BHP Billiton and Wesfarmers.
The new rules released by the International Accounting Standards Board, which take effect from January 1, 2019 are expected to transfer about $4 trillion worth of off-balance sheet debt liabilities onto companies' books.Australia is committed to adopting IASB standards and the IFRS 16 rule will be considered by the Australian Accounting Standards Board at its February 23 meeting.
The change will hit entities with extensive property or equipment leases the hardest. But it will not increase their cost of capital or credit ratings since creditors, analysts and ratings agencies already consider these liabilities when calculating lending arrangements and debt ratios."Analysts have had this right for quite some time, this is just accounting standards playing catch up," AASB chief executive Kris Peach said.
The changes will substantially increase administration while companies and accountants wrap their heads around the changes. But this will be a one-off cost.The changes could create issues in relation to banking covenants on leases because it will make some of the formulas look different.However, Group of 100 chief executive Peter Meehan, who represents the interests of large-company chief financial officers, said entities have plenty of time to sort this out.
The G100 lobbied to have short-term leases excluded from the new regime, a battle it won. The IASB has also exempted low-value assets such as personal computers, mobile phones with an individual value under $7107.
The collapse of bookseller Borders in 2011, which was unable to terminate some of its US$2.8 billion leases to protect its profitability, highlighted the importance of operating leases to an entities' going concern. At the time, those commitments amounted to roughly seven times Borders' reported debt.
The new rule will require the present value of lease payments to be bought onto the balance sheet from day one."These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company's often-substantial lease obligations," IASB chairman Hans Hoogervorst said."It will provide much-needed transparency on companies' lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy," he said.
Initial fears the new rules would reduce the attractiveness of leasing as a finance option to free up cash flow, appear to have been largely quelled."This won't have much of an impact among the big users of leasing aside from putting some discipline around that calculation," Australian Equipment Lessors Association director Ron Hardaker said.Mr Meehand said: "Leasing is a cash flow issue. If this affects your balance sheet and you can't explain it, you've got a problem.
Groups like Qantas are relatively relaxed about these changes, despite it adding $1.18 billion to its debt liabilities. Qantas already applies a more rigorous metric in its capital management framework than the new rules require."This has been a long time coming, it's been well telegraphed and they've plenty of time to adjust," Mr Meehan said.
Nevertheless, the magnitude of debt liabilities this brings onto the balance sheet will see boards and management teams embark on extensive communications campaigns with stakeholders to avoid any misunderstandings.
Qantas' 2015 financial statements show net debt on its balance sheet of $2.5 billion. Once the value of capitalised operating leases is taken into account, this liability increases to $3.7 billion."There will be significant changes to the balance sheet that will take a fair bit of communication," Mr Meehan said.
Qantas owns two-thirds of its fleet, which is higher than most airlines, including rival Virgin Australia Group which leases 55 per cent. Qantas' percentage of leased aircraft is higher in its Jetstar division.
BHP Billiton reports finance lease liabilities of US$438 million. But its total commitments under operating leases, which include leases of property, plant and equipment, are US$2.36 billion.
The IASB expects that this change will impact an estimated USD 3.3 trillion leasing commitments of listed entities using IFRS or US GAAP, with 43 per cent of those listed entities reporting in the Asia Pacific region.
Mining, aviation and retail industries are expected to represent the bulk of those leasing commitments being brought onto the balance sheet. "The change in accounting is not expected to have a fundamental business impact on these entities; the economics of entering into leasing arrangements are unchanged," the AASB said in a written statement.
Task:
Find a professional journal article or web page report of an item of accounting news. The report/article must refer to a current event, consideration, comment or decision that has been published on or after 1st January, 2016. Your article could come from one of the professional journals such as ‘Charter’, from ICAANZ, CPA Australia or ICAEW UK or from other professional bodies. The article should not come from an academic journal. Academic journals generally publish 2 or 4 times a year, thus you may not be able to find the latest accounting news. If you are having a problem ensuring that your article is from an appropriate source, contact your Subject Coordinator for advice.
In your own words, write an essay on the article that you have found. Relate the concepts ideas and facts to one or more theories or topics you have studied in this session. For example, the selected article may link to topics such as measurement in accounting, normative accounting theory (Conceptual framework) or Accounting regulations and politics.
Provide a copy of the article with details of the source, date and page numbers with your report.
Academic writing and appropriate referencing are important componets of this assignment. Please follow the link for resources to improve your writing skills, if you wish to do so.
"https://bit.ly/FoBAcademic-Writing-Skills" bit.ly/FoBAcademic-Writing-Skills
Presentation:
? Assessment items should be typed.
? An essay style of answer is expected with an introduction, body and conclusion for each component. Subheadings are acceptable, point form is not.
? Use 1.5 spacing.
? Use a standard 12pt font such as Times New Roman, Calibri or Arial.
? Include a separate title page with your name, student number, subject code, assessment number and assessment question. Include class time and tutor’s name if applicable.
? Number your pages (except the cover page).
1) Introduction:
This is a discussion of an article. It will begin with a brief description of article, it will consider key issue of the article in terms of accounting theory.
2) Brief description of article in your own words 300 words
Tell the story of article as you going through it, you can say it, these are the main issues of article, you want to say what they are.It is about the accounting setting process. It also got accounting regulations and politics, Measurement. Main issue is being accounting standards setting process, accounting regulation and politic and measurement. Talk about big things to talk about. All you doing is looking to indicate in your 300 words that you can see these issues in article and you can relate to these specific theories.
3) Discuss each issue in order of priority (3 Issues) 3 x 350 = 1050 words
Issue 1: Definition of Standard setting process. How Standard setting process works, in doing that talk about Conceptual Framework, as standard setting process involves Conceptual framework , give definition of Conceptual framework and Conceptual framework is normative in nature give definition of Normative theory. Have ref of Deegan and IFRS16 section. Now, how is that apply to IFRS 16 as seen in article. How does this process, how does this theory relates to what the author is writing about in article. This is what the article is saying and this is what the IASB has done. Give intext reference.
Issue 2 Then we can go into accounting regulation and politics and say in terms of regulations the theories would be public interest theory & private economic interest theory, define them. Now, how does this theory relates to what the author is writing about in article. Give intext reference.
Issue 3 Finally you get to measurement, Define them and how does this theory relates to what the author is writing about in article. Give intext reference.
4) Conclusion 50 to 100 words
Summarize everything.