Recognition Of The Elements Of Assessment Answer

Dsicuss about the Recognition of the Elements of Financial Statement.

 

Requirement (a)

Particulars	2017 ($M)	2016 ($M)
Total Liabilities (A)	13681
Total Assets (B)	17221	16705
Net Income (C)	1033
Average Total Assets (D)	16963
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Debt Ratio (A/B)	0.794
Return on Assets (C/D)	0.061

The above table shows the calculation of both the Debt ratio and Return on Assets (ROA) ratio of Qantas for the year 2017 by applying the standard of AASB 117. Here, for the calculation of ROA, ‘Total comprehensive income for the year’ is considered as the net income of Qantas for the year 2017. As per AASB 117, these ratios are calculated by not taking into consideration the lease assets and liabilities in balance sheet (ey.com, 2018).

Requirement (b)

As per the earlier discussion, the introduction of AASB 16 will bring some changes in the lease accounting for Qantas. In the balance sheet, Qantas have to recognize the amount of lease assets and liabilities that will increase the total amount of asset and liability of the company (Joubert, Garvie & Parle, 2017).

As per the 2017 Annual Report, Qantas has total non-cancelled operating lease commitments of $2218 million and it is a major liability of the company. Apart from this, Qantas also has operating lease assets worth $1794 million. Thus, according to the standard of AASB 16, it is the obligation on Qantas to recognize these liabilities and assets in the balance sheet that will increase their level of liabilities and assets (Dakis, 2016).

Particulars	2017 ($M)
Revised Total Liabilities as per AASB 16	15899
Revised Total Assets as per AASB 16	19015

As per the above table, the application of AASB 16 has increased the amount to total liabilities and assets in Qantas that will also change the results of the calculated ratios.

Particulars	2017 ($M)	2016 ($M)
Total Liabilities (A)	15899
Total Assets (B)	19015	16705
Net Income (C)	1033
Average Total Assets (D)	17860
Debt Ratio (A/B)	0.836
Return on Assets (C/D)	0.058

The above table shows that the change in total liabilities and assets has led to the change in debt ratio and ROI.

Requirement (c)

It has been discussed in the earlier section of this report that the implementation of AASB 16 will put the obligation on the companies to recognize and record their operation lease liabilities and assets in the balance sheet (Wong & Joshi, 2015). For this reason, this can be a burden for some companies as they will have to pass many financial lease related transactions. Moreover, this standard will lead to the increase of both the assets and liabilities of the companies; and the increase in liability is not a good sign for the financial health of the entities (Peach & West, 2017). However, it is required to mentioned that the implementation of new lease standard will bring trasnerecy in providing information about the existing financial commitments of the business organizations (Wong, Wong & Jeter, 2016). Thus, based on the above discussion, it can be said that AASB 16 has both negatives and positives for the companies.

Requirement (i)

Make goods on lease assets is regarded as a commercial lease provision that specifies about the process to leave a property at the end of the lease term.

As per the Conceptual Framework, in order to be classified as liability, the items need to meet two criteria. According to the first criteria, it is probable that there will be future sacrifice of economic benefit in order to meet the current obligation. The make good terms will deliver to restore the premise to its actual state at the lease commitment date by the tenant. Thus, it satisfies the criteria due to the fact that the lease liability settlement would raise restoration cost that is an outflow of cost embodying economic benefits (Day & Stuart, 2013).

As per the second criteria, the companies can measure the amount of the liability reliably. Different reasons indicate towards the fact that the restoration cost could not be measured reliably. There may be failure of the lessor in making comparison for enforcing make good provision due to not generating a condition report at the commencement of the lease term. Apart from this, both the lessor and the lessee may consider the make good clauses as the last priority and can even consider it until the expiry of the lease term. In most of the business organizations, it can be seen that the provision for cost of return meet the asset return cost at the end of the lease term and recognized over the lease term (Day & Stuart, 2013). Thus, it can be said that the criteria is satisfied in this case.       

Requirement (ii)

Provision is considered as a liability and the companies record them under the liability head of the balance sheet as current liability. At the same time, provision is considered as the expenses that the companies recognizes in the present time before gaining precise information about the exact amount of the expenses.

References

AASB 16: Leases. (2018). KPMG. Retrieved 11 May 2018, from https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-leases-standard.html

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

Day, R., & Stuart, R. (2013). New lease accounting proposal: what it means and what companies can do to prepare. Financial Executive, 29(6), 11-13.

Definition and Recognition of the Elements of Financial Statements. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf

IFRS 16 LeasesThis Effects Analysis accompanies, but is not part of, IFRS 16. (2018). Retrieved from https://www.ifrs.org/-/media/project/leases/ifrs/published-documents/ifrs16-effects-analysis.pdf

IFRS 16: The leases standard is changing Are you ready?. (2018). Retrieved from https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf

IFRS . (2018). Ifrs.org. Retrieved 11 May 2018, from https://www.ifrs.org/supporting-implementation/supporting-materials-by-ifrs-standard/ifrs-16/

Joubert, M., Garvie, L., & 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), 1-11.

Leases A summary of IFRS 16 and its effects. (2018). Retrieved from https://www.ey.com/Publication/vwLUAssets/ey-leases-a-summary-of-ifrs-16/$FILE/ey-leases-a-summary-of-ifrs-16.pdf

Peach, K., & West, C. S. (2017). Invitation to comment on ED 277 Disclosure Requirements for Tier 2 Entities.

Qantas Investors | Investor Centre. (2018). Investor.qantas.com. Retrieved 11 May 2018, from https://investor.qantas.com/investors/?page=annual-reports   

Wong, J., Wong, N., & Jeter, D. C. (2016). The Economics of Accounting for Property Leases. Accounting Horizons, 30(2), 239-254.

Wong, K., & Joshi, M. (2015). The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), 27.