AASB 16 Leases in Practice: Case Study of Wesfarmers Limited Essay on Lease Accounting and Financial Reporting INTRODUCTION TO AASB 16 LEASES

See the updates about the accounting system; most probably, you must have heard of the news regarding the change in accounting standards. Among those is AASB 16 Leases which made companies like Wesfarmers Limited change their treatments related to their lease accounts on their balance sheet. What is AASB 16 and how does Wesfarmers Limited deal with it?

This is a new standard, AASB 16 Leases, that has been established to bring more transparency and harmonization in the reporting of obligations of the leases across the entities by moving virtually all of them off the earlier standard, AASB 117 through which several managed to get most of theirs off the balance sheet. Indeed, that has brought big impacts on financial reporting.

We take the case of Wesfarmers Limited, one of Australia's largest firms. While studying their lease accounting for the impacts brought about by AASB 16, pains that AASB 16 was designed to alleviate, and transitions they achieved to their reporting.

Getting Crystal Clear: Understanding AASB 16 Leases: The Basics

Before getting into the journey of Wesfarmers, let's get crystal clear about what AASB 16 Leases is all about.

What is AASB 16 Leases?

AASB 16, in its entirety, changes the character of the lease presentation. Most of the leases, according to this standard, have to be presented in the balance sheet on both sides through the right of usage asset and its corresponding lease liability.

It increased transparency to all the stakeholders within a corporation; company health was understood quite well and the risk for an investor's face is well readable and comparable

Leasing Accounting Standard Changes

AASB 117 has addressed only finance leasing. The presentation of operating lease payments was not presented there. It has been treated by charging on a time straight-line basis.

With AASB 16, however, all classes of lease now must appear on the face of the balance sheet; after that, accrual occurs in the liability related to a lease. Next in line are recognitions of rights to use leased assets. Well, that is a fairly significant change mainly because companies such as Wesfarmers Limited have been doing a whole lot of leases.

Implementation of AASB 16 to Wesfarmers Limited

The leasing agreements of the Company Wesfarmers Limited consist of a variety of retail, industrial, and resource businesses. It received AASB 16 and was bothered by it while coming. Likewise, during the course, it also provided vast scope to smoothen down the account for a leasing business and build up the reporting revenues.

Problems Faced by Wesfarmers

Identification of Leasing Agreement

All these should be identified to fall within the scope of AASB 16. This will be a great opportunity to be taken by Wesfarmers to systematically review their leases in the business groups, such as retail shops, warehouses, or office blocks, amongst others.

This also includes leasing agreements and contracts, the information along with available terms and options at a particular time, discount rates, along renewal choices which should also be included under these categories of accounts so that this process is carried out without any inadequacy within the limits.

System Process Updates

That is recorded on the balance sheet. What will be required are changes for Wesfarmers' in-house processing and systems; policy changes, asking management leasing systems should be new, or employee training with the new regulations concerning proper interpretations and proper enactment.

Benefits of AASB 16 to Wesfarmers

Although this challenge is posed by AASB 16 for Wesfarmers, let's move forward to find the pros-side benefits of this newly adopted accounting standard AASB 16.

Increased Transparency

All the lessees are smaller; still, they will remain available on the books of the corporation. These all very evidently reflect better visibility of the financial health of the firm in front of the stakeholders in the form of right-of-use assets as well as leased liabilities. Thus, proper reporting is turning out to become better.

Improved Financial Reporting

This would portray the more efficient version of Wesfarmers' financial statement. The corporation would thus recognize lease and the liability that its existence brings about; thus, the situation prevailing would be reflected, guiding stakeholders toward more objective decisions on this issue.

Financial Statements of Wesfarmers under AASB 16

It will have an extreme effect on the financial statement of the firm. This is because, considering the change in accounting rules dealing with the treatment of leases in accounts, the firm of Wesfarmers needs to alter its company's balance sheet.

Wesfarmers's Balance Sheet Alteration

AASB 16 explicitly declares that a firm of Wesfarmers might capitalize both asset along with relevant liability for such lease on the firm's balance sheet. It usually increases both assets and liabilities. For example, if a company is going to lease some retail space for 10 years, then such a liability would emerge: an obligation to pay that liability in future which is needed to amortize usage of that particular leased property; simultaneously that right to use said property is accrued as an asset of the capitalized that particular firm.

Right-of-Use Asset and Lease Liability

Right-of-Use Asset: This is the right to use an asset for the duration of the lease. At initial recognition, it should initially be measured at the lease liability and should include or subtract various items such as lease incentives, prepaid lease payments, and direct costs that were incurred to obtain the lease.

Lease Liability: The liability is formed by the future obligation to pay for lease payments. This should be paid in the future. Lease Liability is presented as a liability on the face of the balance sheet and measured at the present value of future lease payments using the appropriate discount rate.

Effect on Wesfarmers' Income Statement

AASB 16 extends the effect to the income statement. The leases were mainly disclosed at straight-line basis during the lease term, an operating lease to AASB 16

Wesfarmers will, in this case, disclose the cost of the leases into two broad categories.

1. Depreciation of Right-of-Use Asset: This is to reveal the cost of wear and tear on the asset being leased over time.
2. Lease Liability Interest: It is the finance cost of the lease.

It increases in the earlier years of the lease term and would decrease in such expenses in the later years, given a change in the accounting method of costs for a lease.

Case Study: Transitioning under Wesfarmers Approach to the New Lease Accounting

For example, the case is Wesfarmers Limited over the application of the process AASB 16 on a company basis. The method that the company employs is very enlightening concerning the issues and prospects associated with the process of adoption of a new rule related to a new account for leases.

Step 1: Prepare for change

This process is initiated at Wesfarmers when all existing leases appearing in the books are torn apart to observe whether those are within the coverage of AASB 16.

There was a need for coordination among various departments since all the leases were diversified across the different business units. Once identified, the accounting department of Wesfarmers started its coordination process by working hand-in-hand with its external auditors to confirm that all aspects relating to these terms of leases have been covered accurately.

Step 2: Upgrade of Systems and Staffing

It was an enhancement of the accounting system of Wesfarmers. It simply enhanced the software of the company dealing with the intricacies of AASB 16 on the aspect of tracking liabilities and right-of-use assets.

It provided the employees with knowledge about new regulations about how it operates and what one should do to implement the rules properly and, consequently, come out with the proper report.

Step 3: Reporting Changes

The Company made the financial statements better. The company represented its balance sheet with the right-of-use asset and the lease liability. The company also facilitated this by providing detailed disclosures on how AASB 16 had impacted their financial situation and performance and made it easier for the stakeholders to understand all the changes.

Advantages of the Implementation of AASB 16 over Wesfarmers:

In several direct benefits from AASB 16 that were introduced at various financial reporting levels and within operational efficiency inside Wesfarmers

Accurate Decision

It will then be reasonable in the decisions the management of Wesfarmers should make about future lease deals based on clear pictures of the burdens that leasing might bring to the table. A management team, for instance, of Wesfarmers can balance the costs that new leases cost against the benefits that the firm will acquire upon the analysis influence on the balance sheet and also the overall business well-being.

Effort with flexibility

AASB 16 has reduced the management complexity as well as the reporting of Wesfarmers regarding the issue of leasing. Accounting, operations, and every other department knows about their responsibility in relation to the company's leases. Apart from this, assets are also used nowadays since they are clear regarding the requirements of leasing.

Conclusion

In other words, it is AASB 16 postoption lease accounting and reporting. Therefore, the implementation of such a method for Wesfarmers Limited benefits by presenting them with their proper financial statements order, as it all entails the transparency and the efficiency of being challenging enough, getting transformed into AASB 16.

Most companies are moving into new standards, and hence students and young professionals must know what AASB 16 is all about when it comes to lease accounting. The best example that describes the implementation phase of AASB 16 is the experience of Wesfarmers.

Just knowing how to keep up with the evolution in standards like AASB 16 may just keep you and your business or financial reporting career on track.