HA3011 Impact of Changes in Lease Accounting: Analysis on White Haven Coal Assessment Answer
With the ramified economic changes, there are several accounting concepts and standards have been amended with a view to up harmonization in the reporting framework of organizations. However, the recent financial years have marked years of change for every listed organisation globally. Based on (IFRS), every country is required to translate their national accounting standards based on the guidelines of IFRSs. For Australia the older AASBs have been overwritten by the national accounting body by newer AASBs based on IFRS. One such change is brought in the accounting standard applicable on Leases. The earlier AASB 17 applicable on lease arrangements entered into by listed entities is replaced by newer AASB 16, Leases. The new accounting standard has brought significant change in the manner of lease accounting. These changes have been effected to make the financial statements more transparent and raise the understanding of the users.
The impact of the changes and the disclosure requirements on one of the Australian listed company White Haven Coal is analysed in the current report. Along with, the several accounting concepts used by the company in preparation of their financial statements are also listed.
The accounting concepts used by White Haven Coal
The different accounting concepts as applied by White Haven Coal in preparation of financial statements are as follows:
- Dual Aspect Concept: the contemporary financial statements are prepared on the basis of journal entries. The journal entry is a mechanism of recording financial transaction in accounting form. Through journal entry every transaction is recorded in a manner which effects the accounting equation (i.e. assets = Liabilities + capital) in dual manner. Because of this the accounting equation always stands accurate. E.g. when any plant is purchased, the assets are affected in two ways. One asset i.e. plant increases and other asset i.e. cash declines (Singhvi, and BODHANWALA, 2018). This concept helps company to strengthen the reporting framework and strengthen the financial accounting process in organization.
White Haven Coal has effectively applied this accounting concept. Because of application of this concept, the AASB 16 has two accounts to be recognised in balance sheet in a lease agreement. Against every lease liability, a corresponding right-of-use asset exists.
- Accounting cost concept: the business is required to recognise the assets acquired on the basis of their historical cost. The historical cost just not includes the purchase price alone, but every related expense incurred in bringing the asset in a position to be used by business, e.g. installation charges, delivery charges etc. There could be exceptions where fair value method is used. The same has to be clearly mentioned in the annual report (Nakajima, and Tobita, 2019). This accounting concepts helps in determining the historical value of the assets and used to divulge the true and fair view of the assets and other financial transactions in the books of accounts of company.
White Haven Coal has prepared its financial statements on the basis of historical cost only. The only exception where fair value accounting is used includes the derivative financial instruments.
- Accrual concept: the transactions are recognised as and when the conceptual framework and the accounting assets allow recognition, irrespective of their receipt of payment in cash form. The substance of transaction prevails over its cash translation. E.g. revenue can be recognised when conditions of AASB 15 in relation to performance of performance obligation is done even if cash against the same is yet to be received (Kimmel, et al. 2016). This accrual concepts allows company to record the financial transaction in the books of accounts at the time when it occurs irrespective of the fact when the payment is received and made to others.
White Haven Coal is recognising accrued income in the statement of financial performance only because of the application of the accrual concept. This helps in maintain the true and fair view of the recorded financial details in the books of accounts of company.
- Going concern concept: the business and the business transactions are not carried on to be closed in a definite time, unless for a specific purpose. When business transactions are undertaken and financial statements are prepared the perspective of business running in operation for an indefinite time is considered. Because of this concept, every transaction which impacts more than one financial year is not treated to impact the initial financial year alone, but treated in a manner that it impacts upon every financial year of its existence (Israel, Onyeka, and Barisua, 2018). This concept helps company to maintain the sustainability and reveals the key aspects of the financial leverage in the timely manner. It shows the sustainability aspects of the company and if anything danger is seen in the company then there is need proper disclosure of that situation to the stakeholders (White Haven Coal, 2019).
White Haven Coal has charged depreciation on each component of their Property, Plant and Equipment in accordance with their economic and useful life. Had this concept was not applied by the entity, the entire expense on purchase of property, plant and equipment would have been charged as revenue expenditure, rather than capital expenditure.
- Accounting period concept: the monetary transactions of any business are not recorded for inconsistent or indefinite time frames. To measure the performance and position and recognise patterns of profits and growth, the life of a business is divided in reporting periods of equal length, usually 12 months. This period is referred to as accounting period and marks as the financial year for the organisation. For every organisation the financial year has to be of same length every year (Kieso, Weygandt, and Warfield, 2019). This accounting period concepts helps in recording the transaction in the related time periods of the accounts.
The accounting period of White Haven Coal is of 12 months. The period commences from 1st July every year and ends the coming 30th June (White Haven Coal, 2019).
Changes incorporated by new (AS) for lease AASB 16 and discussion of these issues with example
AASB 16, Leases has taken up the places of earlier prevalent standard for leases, i.e. AASB 117. With the introduction of the new standards, several changes have translated the manner of preparation of financial statements. White Haven Coal has retrospectively applied the AASB 16. Resultant, the company had to restate the financial statements for the comparative financial years. The changes incorporated by this standard can be observed in the case of White Haven Coal as follows (White Haven Coal, 2019).
- Changes observed in the consolidated financial statement
|Change brought by AASB 16||How White Haven Coal effected the change in the Financial statement (Position|
|The leases are no more distinguished as operating lease or finance lease. For every recognised lease exceeding a term of 12 months, a lease liability is required to be created in the balance sheet. Corresponding to the lease liability, a right-of-use asset is also reflected in the financial statements. The value recognised for both is equivalent to the present value relating to the “non-cancellable lease payments” (Joubert, Garvie, and Parle, 2017).||As retrospective approach is followed, the company had restated the balance sheet figures for both financial year 2017 and 2018. The amount of lease liability recognised for financial year 2018 had been $205,874,000 included in the Loans and borrowings, while a right-of-use asset as included in the property, plant and equipment is created for $195,868,000. For financial year 2017, these figures amount to $236,766,000 and $228,283,000 respectively(White Haven Coal, 2019)..|
|Corresponding to the recognition of new asset and liabilities, the change is also reflected in the figure of deferred tax assets.||For financial year 2018 and 2017, the company created additional deferred tax assets of $3,002,000 and $2,545,000 respectively (White Haven Coal, 2019).|
For the year in which AASB 16 is initially recognised, a difference is observed in the amount of lease liability and right-of-use asset. This is because of difference in the discount rate used to compute the present value in both the cases (Xu, Davidson, and Cheong, 2017).
The difference in both is adjusted through the retained earnings.
|For financial year 2018 and 2018, the figure of retained earnings is raised by $7,004,000 and $5,938,000 respectively (White Haven Coal, 2019).|
Source: (White Haven Coal, 2019), (Page: 72)
- Changes observed in the statement of financial performance
|Change brought by AASB 16||How White Haven Coal effected the change in the statement of financial performance|
In the older standard, the charges against the operating leases used to reflect as component of operating expenses as financial commitments, with no separate bifurcation.
However, with AASB 16, the recognised lease liability is unwound using the method of effective interest. The charge is made as financial expense in the statement of comprehensive income (Brumm, and Liu, 2019).
|Application of this changed method in the lease commitments entered by White Haven led to rise in the financial expenses for financial year 2018 by $11,326,000 respectively (White Haven Coal, 2019).|
|The corresponding recognition of Right-of-use asset is also required to be amortised over the lease life using straight line approach. This is reflected by either charging it as depreciation and amortisation in the statement of comprehensive income, or by allocation of the amortised amount as an inventory cost component using the statement of financial position.||White haven Coal adopted the approach to charge the amortisation in the statement of financial performance as depreciation and amortisation. The amount charged for financial year 2018 had been $62,108,000.|
|Owing to few lines of expenses added and deducted a restatement of the operating expenses and income tax is also required to be done (White Haven Coal, 2019).||White Haven Coal witness overall decline in the operating expenses by an amount $71,911,000 for year 2018. For the same financial year, the amount of income tax also declined by $457,000 because of tax deductible expenses (White Haven Coal, 2019).|
Source: (White Haven Coal, 2019), Page: 73
- Changes observed in the CFS (Cash flow statement)
|Change brought by AASB 16||How White Haven Coal effected the changes in (CFS) cash flow statement)|
Because of removal of distinction between the operating and financing leases, the treatment of lease payments and interest upon the same has been changed.
Under AASB 16, the portion of principal amount paid by an organisation is now considered as an outflow under financing activities, unlike the earlier practice of classification of operating lease expense in operating activities (Giner, Merello, and Pardo, 2019).
|Resultant, the net cash used in the financing activities of White Haven Coal raised by $60,585,000. The cash generated by operating activities however, raised by the same figure (White Haven Coal, 2019).|
|The interest expense on the lease payments is identified as an expense of operating nature, and hence is considered in the operating activities of cash flow (White Haven Coal, 2019).||The amount of interest paid charged as cash used in operating activities amount to $11,326,000.|
Source: (White Haven Coal, 2019).
Key disclosures made by White Haven Coal on application of AASB 16 over AASB 117 including the transitional provisions
On application of AASB 16, Leases many disclosures are required to be made by an organisation, including both of qualitative and quantitative nature. The objective is to transparently present the manner of application of the standard and the effect observed. The following checklist discusses the disclosure requirements on a general level, along with their application by White Haven Coal (White Haven Coal, 2019).
- The AASB 16, Leases however is applicable to most of the listed entities for financial period starting from 1st January 2019. However, if any organisation adopts the standard earlier, they have to disclose the fact of early adoption. Also the method of adoption i.e. retrospective or prospective has to be disclosed.
White Haven Coal adopted the standard early from 1st July 2018 and disclosed the same in their annual report (White Haven Coal, 2019).
- The transitional impact on initial recognition has to be expressively stated in quantified manner. The main areas impacted are cash flow statement, statement of financial position and statement of financial performance. The effect is because of recognition of lease liability and right-of-use asset (Kabir, and Rahman, 2018).
White Haven Coal has restated its financial statements for financial year 2018 and the comparative year 2017. The lease liability and right-of-use assets have been recognised in the balance sheet. The recognition difference in the both has been translated through retained earnings. The impact of the adoption of AASB 16 has also impacted the EBIDTA of the both financial years. The restated EBIDTA for year 2018 had been $1001.2 million.
- The method used by the organisation in identification of contracts amounting to lease contracts is expressively stated in the annual report. The basic principles of standard as followed by the organisation are disclosed. Included along is the disclosure about any particular requirement laid by standard, which the organisation has not been able to follow with reasons for the same (de Albuquerque, et al. 2017).
White Haven Coal has described how the principles of AASB 16 have been adopted in business (White Haven Coal, 2019).
- The rate of depreciation applied and the method of depreciation followed to charge depreciation and amortisation expense is clearly stated in the annual report.
White Haven Coal has used the straight line method to charge depreciation on the differed right-of-use asset. The rates of depreciation charged on these assets are mentioned in the annual report (White Haven Coal, 2019).
- The details about the estimates used and the judgements made by the management. The judgement relates to whether a contract amounts to lease or not, the lease terms determination, any separation of the arrangement in lease and service component and the discount rate (Pavić, Dečman, and Sačer, 2017, January).
White Haven Coal has clearly reflected in their annual report details about the accounting estimates, judgements and assumptions significant to the lease arrangements separately.
After assessing the implication of the AASB accounting standards and annual reporting of company, it could be inferred that White Haven Coal has effectively applied this accounting concept and on the basis of the application of this concept, the AASB 16 has two accounts to be recognised in balance sheet in a lease agreement named against every lease liability and a corresponding right-of-use asset exists. Nonetheless, all the accounting concepts and key disclosure made by company helps in strengthen the true and fair view of the recorded financial transition in the books of accounts. Therefore, implication of the proper AASB in the accounting framework is required to strengthen the transparency in the books of accounts of company.