Impact of Accounting Standards - Effect of the New Standard - Accounting Assignment Help

Assignment Task :

Question 1

“New research estimating the impact of accounting standards which require leases to be brought on balance sheet finds up to $100 billion of liabilities will be recognised for the top 100 companies beginning this year.

The findings underscore that the effect of the new standard goes well beyond retailers.

Lease Accelerator concludes that Woolworths, Wesfarmers, Ramsay Health Care, Commonwealth  Bank of Australia and Telstra face $54.5 billion of operating lease obligations between them, based on its analysis of published financial statements and its own assumptions. The top 10 is rounded out by National Australia Bank, Qantas Airways, BHP Group, Insurance Australia Group and Rio Tinto.

Michelle Laybutt, who is a vice president at the enterprise lease accounting software provider, says the UK experience indicates compliance with AASB 16 Leases, derived from IFRS 16, is more complicated than many companies anticipate. The purpose of the standard is to bring transparency to obligations that companies are required to meet, but do not disclose in balance sheets.

Sir David Tweedie, former chairman of the body governing international standards, famously remarked that his lifelong ambition was to fly in a plane that existed on an airline's balance sheet.

The standard applies to annual reporting periods beginning on or after January 1, 2019.

"It's far more complicated than just an excel spreadsheet," Ms Laybutt said. For example, entitiesmust disclose the obligations related to their property  leases, but also the fixtures and equipmentthat come with it.

AASB 16's reach is such that it will impact the profit and loss statements of entities. Most companiesprefer to lease assets instead of owning them.

Macquarie research published in 2018 warned that Myer could fall into the red upon implementingthe new standard when almost $3 billion of leases with a present value of $1.9 billion come onto itsbalance sheet, causing its net debt-to-EBITDA (earnings before interest, tax, depreciation andamortisation) to blow out.

Citi warned in 2017 research that Woolworths' net debt-to-EBITDA will rise from 1.0 times to 3.7times.”

Extract from Poliak, V. $100b of lease liabilities headed for balance sheets, The AustralianFinancial Review, March 20, 2019.

Required:

1a) Before application of the new leasing standard why are operating leases not included inbalance sheets?

1b) Why would increases in the net debt-to-EBITDA ratio of the size described in this article beof such concern?

1c) What theory is most relevant to your answer to b) above? Briefly explain this theory and itsrelevance

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