HI6025 Accounting Theory and Current Issues

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HI6025 Accounting Theory and Current Issues




The essence of lease and the changes that could be implemented by bringing lease as a part of the lease accounts. At first, the concept, as well as drawbacks of AASB 117, has been critically evaluated in this report. The change and the need for the same have formed the second bets criteria that are to be met by the company Brambles. The concept of new standard AASB 16 and the treatments that are to be done has been highlighted here also. The records show the tendency of classifying the lease as off-balance sheet items along with suitable examples showing the changes that are to be seen in this standard has been discussed effectively.  The key disclosures on the lease contract done by the Company and the effects of the transition on the financial liabilities of the company Brambles Ltd have got special attention in this report.

Table of Contents


Accurate and error-free financial statements, abidance with accounting standards and perfect and timely decision making combines together to give the companies the required taste for long term success among their competitors. Brambles, the leading global supply chain, and logistics business is the example of trust and remains the first option for the customers has been used as the main company for analysis in this report. Exploration of different accounting standards required to be followed by the companies for showing authenticity in accounting has been reflected as the central theme of this assignment. Further, in this report, the issues associated with the AASB 16 Lease accounting and main benefits existing in the new lease accounting has provided complete coverage stating the essence of standards in financial statements. 


Critical evaluation of old lease accounting standards

According to Jensen et al. (2018, p.20), Lease financing is the most important source for financing needs to be maintained well in a company and Brambles Ltd in this field is of no exception. Different issues involved in lease financing reduce the flexibility of this standard to some extent. This has been clarified as under:

Firstly, the lease accounting involves payment of the fixed amount to the lessor so inflation does not get adjusted in this making calculation less authentic

Double taxation first at the time of purchase and second at the time of sales increases the cost of the assets that are to be leased

Careless use of asset can damage it much before the expiry of the asset (legislation.gov.au, 2018)

Figure 1: Issues in Lease accounting

(Source: aasb.gov.au, 2015)

The above-stated issues seen in the accounting standards of lease accounting make it less efficient and advantageous in Brambles

Different accounting provisions IAS 17, Leases, AASB 117 and AASB 16 are the main standards that are used for recording the provision of leases in Brambles Ltd and other companies. 

AASB 117 and its drawbacks

In the words of Toland and Colwell (2017, p.32), AASB 117 (the old accounting standards for lease) was mainly introduced for smoothening the lease process in companies. Companies following IFRS standards used that standard for lease accounting since 2005. AASB 117 is mainly equivalent to IAS 17 and in this standard initial direct costs included in the definition of the interest rate is included. Apart from that in this standard, the application is done as per the Standard of Materiality AASB 1031 (Xu et al. 2017, p.34). Under this, the lease is classified as an economic substance rather than a legal form. Under these standards, the economic life is the period for which the asset is usable to the users and fair value means the amount at which the asset could be exchanged as per the willingness of the users. The drawbacks that exist in the accounting standard AASB 117 are as follows:

In this standard assets are at first converted into financial and operating lease then the accounting treatment for lease is done which make this a complex and time-consuming task

A drawback of not bringing all the leases into the balance sheet made AASB 117 manipulative and less accurate (Holland, 2016, p.666). 

AASB 16 has introduced lease as a single accounting model that generally recognizes the liabilities and assets with more than 12 months whereas in AASB 117 the lease classification is mainly done based on the rewards and risk that  that remains incidental to the lease that is owned by the lessee or the lessor

The aforesaid drawbacks that existed in the AASB 117 demanded replacement of the new version and that has been introduced as AASB 16 in the accounting standard group (Holland, 2016, p.666).  

Reasons behind the necessity of the change

In AASB 117, the tendency to show all the leases as operating lease could be stopped by this change. It has been seen that the companies generally segregated maximum assets as an operating lease and shows that as footnotes in the balance sheet. This tendency for not showing as the assets in the balance sheet usually made this accounting less authentic and manipulative. This nonprotection given to the small shareholders triggered the required change. It became important for changing the lease standard from AASB 117 to new and fully equipped and better lease standard (leaseaccounting.com, 2018). 


Figure 2: Factors triggering the change behind the AASB 117 to AASB 16

(Source: Dakis, 2016, p.99)

The further important notion behind this concept was that showing the lease standards as footnotes generally made the small investors hurt who have lesser resources in hand. In addition to that in the new standard generally, the assets are shown as a financial lease that has further helped in determining the return on assets that are the good indicator for performance analysis of a company. This aspect has helped Brambles Ltd in recreating the reputation and trust of the shareholders. In addition to that, the straight line expense for the entire time period of the lease remains the same got changed to the front-loaded expense that gets reduced at the time passes in the lease contract (Dakis, 2016, p.99). These necessitate the change for Lease accounting standard so that accuracy could be maintained in the lease accounting process. 

Description of the changes that have been incorporated in the AASB 16

AASB 16 is the new leasing standards introduced from February 2016 for replacing the off-balance sheet operating lease loopholes as seen in AASB 117. This new standard is mainly based on IFRS 16 (leaseaccounting.com, 2018).  It contains some specifications that make this more efficient than AASB 117. Firstly the asset is identified and in this respect if the asset is physically distinct and if it is substantially capable to be an asset to be received by the lessee when it is recorded under this new standard of lease accounting. Allocation of economic benefits right to directly use the asset and stating the appropriate use of the asset are mentioned as the important aspect for lease accounting in this new standard (Joubert et al. 2017, p.2). The main changes that have been incorporated in AASB 16 are as follows:

Effective from 2019, the responsibility of bringing the majority of operating lease on balance sheet is the major change done by AASB 16 (assets.kpmg, 2017)

Under the provision of AASB 117 the plant and equipment was generally shown as off-balance sheet items but under AASB 16 this is shown as right of use asset bringing more transparency in the commitments done by the company for lease and also serves as the tool for determining the performance benchmark of the company (home.kpmg, 2018). 

Showing the lease expenses as front-loaded and reducing the value of that expense as the time of the contract goes has been the major change done for bringing more authenticity in the lease accounting treasury. (nsw.gov.au, 2017)

Brambles Ltd also by using this new technique have helped in making the financial statements more authentic and error free. 

Describing how the companies having significant lease gets affected due to lease standard change

Previously when IAS 17 was followed then the companies that are reporting their lease in footnotes now need to maintain a full record of the lease in the balance sheet and not in the footnotes, therefore, the companies that are using an only significant level of lease suddenly reported an increase in assets or liabilities. This confusion due to change could reduce their stakeholder's investment. This change could impact their performance ratios as the situation of a lease or buy option will arise in the companies using significant lease (pwc.com, 2018). Accurate recording of the lease shows that accuracy and transparency are maintained in the accounts that could further help in significant recording of the assets and liabilities in the balance sheet of the company and Brambles Ltd is no exception to this.

Therefore, the companies need to take better guidance and this stepwise recording of lease asset and estimation of the lease amount shows that it becomes a time-consuming task for the companies who use a significant amount of lease.  

Assessing the reasons behind the tendency of taking lease contracts as an operating lease

In AASB 117 as the chance for segregating the lease contracts exists so the companies used to segregate the lease contracts mostly as operating lease so that the assets could not be showcased in the balance sheets. As operating leases are shown as footnotes in the balance sheets so by segregating the assets under the operating lease the companies could keep their liabilities and assets reduced and this could give rise to misstatements in the statements. 

For the purchase of not recognizing the right of use asset and lease liability in the balance sheet the companies mainly segregated the assets and liabilities under an operating lease. Lowered amount of liabilities that could be shown by this segregation helped the companies in risk reduction that may arise when the lease liabilities are shown in the balance sheet.  This off-balance sheet treatment done by most of the companies under AASB 117 has reduced the chances for the companies in showing the lease assets as ROU assets and liabilities as the obligations for making lease payments has made the balance sheet less accurate. The right amount of liabilities when not shown could attract more shareholders who may not get interested in the company when liabilities go up acted as an advantage for those companies who segregated most assets and liabilities as operating lease contracts and kept that as an off-balance sheet.

Understanding how positive theory of accounting relates to this behavior

Positive accounting theory tends to make better predictions for real-life transactions events and transform them into accounting transactions. The behavior of segregating most of the assets and liabilities as operating lease reflected their accurate use of positive accounting theory. Under this theory mainly the expense is chosen that reduces the costs of the company (publicaccountant.com.au, 2017). By showing all the assets and liabilities as operating lease the managers could be able to minimize their costs and show lesser liability to the shareholders, this could be well achieved by the help of this positive theory. The choice of the managers in adopting the methods as per their self-interest and cost minimization concept gets well adjusted with the concept of segregating the assets and liabilities as an operating lease. Bringing flexibility according to the ease of the managers further clarifies that managers could be able to segregate liabilities under operating lease contracts.

Analysis of how IFRS 16 are improving the comparability between the lease assets and the companies purchasing those assets

In 2005 it was seen that about US$ 1.25 Trillion off-balance sheet leases were seen in the financial statements of the companies. Missing information or absence of information means the companies who are going to borrow and buy those assets are getting less or rather not getting accurate information. The right to compare the right assets for borrows and buy gets hampered, which further demanded the change of IFRS 16 (ifrs.org, 2018). 

First of all the standard IFRS 16 removed the chances for segregation of operating lease and financial lease, which further reduced the chances for showing the lease assets as footnotes in the balance sheet. The tendency of not showing the lease assets on the balance sheets got eliminated by this change. The chance to recognize all the liabilities and assets and measure them, in the same way, improved the comparability lease contracts between the lessor and the lessee. For example company limited is going to rent a particular warehouse without cleaning services to a company that is going to borrow that (ifrsbox.com, 2018). The company limited needs to incur an extra amount of R1500 for cleaning the warehouse. 

In this case, at first, the segregation between the lease and non lease component is to be done. Allocation of R636 and R 1364 is segregated as the lease and non lease assets respectively. In this case, if IAS 17 was applied then only the expense that is rent would have been shown in the financial statements. However, in IFRS 16 three types of expenses totaling the same amount as shown in IAS 17 is seen. In IFRS 16 the interest related expenses R43256, depreciation related expenses R 267640 and cleaning related expenses R 49104 is seen (accountingweekly.com, 2017). This has improved the chance for assets recognition in an effective way (Davern et al. 2019, p.25). Clear segregation of the expense that is hidden in those assets improves the assets recognition process. This, therefore, improves the comparability between the lease assets and the companies who are borrowing those assets. 

Figure 3: Comparability generating attributes

(Source: Firth and Gounopoulos, 2017, p.25)

Another example says that ABC Company limited needs to pay off CU 100000 in arrears and the machine that has been taken for rent has an economic life and completion of the lease term it will be paid off to the lessor. A close comparison of the lease accounting treatment in IAS 17 and IFRS 16 could help in determining the level of comparability that could be received due to this standard change. In IAS 17 this has been treated as an operating lease and directly the lease payment has been done based on the lease payments and it will then be treated as profit maker and loss maker. Whereas under the changing standard at first ABC needs to recognize the asset use and liability arising from it. Lease payments will be done and increments that could be received from them are determined here (ifrsbox.com, 2018). After estimating the lease liability the depreciation of the ROU assets and lease payments schedule has been determined. In addition to that restatement of the balance sheet shows that clear breakdown of the lease contracts are done in IFRS 16, which enhances its comparability among the lessor and lessee because the company borrowing assets could easily recognize the assets and its profit-generating yield. Therefore, it can be said that comparability enhancement could be done when IFRS 16 is improvised by the companies while doing Lease contracts and Brambles Ltd also maintains complete abidance with this standard. 

Explaining the reasons behind the purchased of assets more and lease of assets is there in the companies

The companies generally need to at first identified the assets or the liability in the balance sheet then the expenses associated with them are determined. This lengthy process leads to the sudden increase in the assets (which is good) and a huge increase in the liabilities is generating a huge question market as to why the companies need to lease assets. It has been seen that after implying the new lease standard the reporting companies are seeing that their assets have increased by 4% but their liabilities have increased by 10%. In addition to that, the ROE and ROA have reduced more, which is not a good sign for the company (Firth and Gounopoulos, 2017, p.25). Complex procedure for lease is reducing the chances for lease. 

Figure 4: Purchase VS lease in companies

(Source: pwc.com, 2018)

Furthermore, now in order to reduce the extra complexity in a lease, the reporting companies are looking for asset purchase rather the lease so that the unnecessary debt enhances and performance reduction.  Material off-balance sheet effects will enhance the assets and reduce the equity and this further creates direct effects on their regulatory capital. This effects of the lease on the balance sheets and financial statement of the companies shows that the companies are trying to purchase assets rather than lease the assets. 

Summarization of the lease disclosures done by the company Brambles

 The annual report of the company will get started to use AASB 16 from 1St July 2019. Here the lease liabilities are generally measured at present value of the future lease payments. Due to the application of the AASB 16, the performance metrics like the financial ratios or the gearing ratios will be impacted. The principal proportion of the lease liabilities in the investing activities will be seen in the disclosures statement of lease accounting. The company is still trying to check the risk and the benefits of AASB 16 before starting any lease contracts has been reflected in the financial statements of Brambles. Financial statements of the company Brambles Ltd further shows that net carrying amount of the plant and equipment under financial lease has been the US $31.8 million

 Figure 5: Lease requirements

(Source: brambles.com, 2018)

Above lease, adjustments show that in 2018, the current finance lease and its liabilities have been $ 5.1 and for noncurrent assets, the lease has been 16.3. Similarly, in 2017, the lease liability has been $5.05 for current assets and $16.6 for the noncurrent assets has been seen in the company.  The varying escalation clause, renewal rights, and varying terms are seen. Recognition of the straight line method shows that the transition of the IAS 17 to AASB 16 has directly impacted the performance of the Brambles.  


Figure 6: Operating Lease 

(Source: brambles.com, 2018)

The transition from IAS17 to AASB 16 has increased their liabilities from $ 2846 to $ 3162 shows that the direct impact of the lease standard on the financial statements was seen (brambles.com, 2018)


In the end, it can be said that the lease accounting and its needs in the companies have been clarified well in this assignment. It is further seen that the drawbacks arising in AAS 17 have also been explored in this research. Apart from that, the need for change in the lease standards and its direct impact on the compatibility of the lesser and the lessee has been demonstrated in this segment. The direct impact of this on the company Brambles Ltd notes the main theme of this research. Impact of the changes seen in the companies due to the tag over of the lease assets over the purchase of new assets acts as the guideline for the research. Thereafter it is seen that the Disclosures of the lease accounts along with the enhanced comparability due to the use of this new effects of the lease contract on the financial statements of Brambles Ltd are not seen elaborately in this report. 



Dakis, G.S., (2016). Upcoming changes to contributions and leasing standards. Governance Directions, 68(2), p.99.

Davern, M., Gyles, N., Potter, B. and Yang, V., (2019). Implementing AASB 15 Revenue from Contracts with Customers: The preparer perspective. Accounting Research Journal, (just-accepted), pp.00-00.

Firth, M. and Gounopoulos, D., (2017). IFRS adoption and management earnings forecasts of Australian IPOs. Available at SSRN 2199034.

Holland, D., (2016). Simplifying income recognition for not-for-profit entities. Governance Directions, 68(11), p.666.

Jensen, J., Rust, E., Mackool, S. and Granneman, J., (2018). OF EQUIPMENT LEASE FINANCING, pp.20-85

Joubert, M., Garvie, L. and Parle, G., (2017). Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The Journal of New Business Ideas & Trends, 15(2), pp.1-11.

Toland, R.K. and Colwell, B.B., (2017). True Lease or Disguised Financing. American Bankruptcy Institute Journal, 36(8), p.32.

Xu, W., Davidson, R.A. and Cheong, C.S., (2017). Converting financial statements: operating to capitalized leases. Pacific accounting review, 29(1), pp.34-54.


aasb.gov.au/ (2018) News Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB117_08-15.pdf

accountingweekly.com (2017) News Available at: https://accountingweekly.com/lease-accounting-lessees-ifrs-16/[Accessed on 25th April 2019]

assets.kpmg/conten (2018) News Available at: https://assets.kpmg/content/dam/kpmg/au/pdf/2017/aasb-16-fundamental-overhaul-lessee-accounting.pdf[Accessed on 25th April 2019]

brambles.com (2018) Annual report Available at: https://www.brambles.com/Content/cms/pdf/2018/Brambles_2018_Annual_Report_WEB_280818.pdf[Accessed on 25th April 2019]

home.kpmg/au (2018) News Available at: https://home.kpmg/au/en/home/insights/2017/04/aasb-16-leases-standard.html [Accessed on 25th April 2019]

ifrs.org (2018) News Available at: https://www.ifrs.org/-/media/project/leases/ifrs/published-documents/ifrs16-effects-analysis.pdf[Accessed on 25th April 2019]

ifrsbox.com (2018) News Available at: https://www.ifrsbox.com/example-adopt-ifrs-16-leases/[Accessed on 25th April 2019]

leaseaccounting.com (2018) News Available at: https://leaseaccounting.com/aasb-16/[Accessed on 25th April 2019]

legislation.gov.au/(2017) News Available at: https://www.legislation.gov.au/Details/F2005B01548/Html/Text[Accessed on 25th April 2019]

publicaccountant.com.au (2018) News Available at: https://www.publicaccountant.com.au/blog/changes-operating-leases-mean[Accessed on 25th April 2019]

pwc.com (2018) News Available at: https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf [Accessed on 25th April 2019]

treasury.nsw.gov (2018) News Available at: https://www.treasury.nsw.gov.au/sites/default/files/2017-04/Guidance%20for%20AASB%2016%20Leases%20-%20New%20Lease%20Standards.pdf[Accessed on 25th April 2019]


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