Financial Statement

Introduction: Based on the outdated AASB 117 – the differences between Finance Leases &
Operating Leases – made with the treatment of both being quite different (Xu, et al., 2017).
Provides flexibility to companies – using OL – undertake fixed cost capital expenditures.
Unfair representation of company’s financial position – as BS do not reflect OL.
In 2010 – recommendation of ‘right of use’ concept – proposed by IASB in Exposure Draft 1 (ED1)
and (ED2) in May 2013 (Xu, et al., 2017).
In 2016 February – Australia adopted IFRS 16 & AASB 16 (Xu, et al., 2017).
Both – applicable to annual reporting periods beginning on or after 1 January 2019 (Xu, et al.,
2017).
Differences – AASB 117 & AASB 16 – amounts currently classified – OL & not recognized on BS
will now be recognized as asset (Xu, et al., 2017).

Balance sheet: assets & liabilities  - requirement of recognition as a right of use asset& liability.
: Equity  - CA of Lease Asset reduce faster – carrying amount of L.Liabilities (NSW,
2017).

Income Statement: AASB117- when interest expense doesn’t (-) from revenue, EBIT
: Due to- depreciation expense  than OLE (PwC, 2016).
: EBITDA- OLC included in OE& replaced by IE&DE that are not (-) from
revenue(NSW).
: Firm with stable portfolio leases, total expense recognized by COL off-balance-sheet LE
incurred in the early periods of the lease terms (XU, et al.,2017).
: Interest charged for LL is reduced – effect on IS will reversed in later periods.
: On the other hand, annual PBT – depend on the lease portfolio (NSW, 2017).

Cash flow statement: known as – impact of COL.

: AASB 16 – outflow of operating activities – expected  - IE is smaller – OLE (PwC,
2016).
: In the meantime– outflow of financing activitiesthan previous–principal repayment
include.
: TCF – remained unchanged – due to identical cash payment (NSW, 2017).
: Refer to research done by XU (2017) – industries to the extent – affected – COL.
Conclusion: ‘ROU’ method foe leases – in coherence- with financial reporting conceptual
framework – aimed to improves – transparency of financial statements – AASB 16 (Xu, et al.,
2017).
: It enhances – transparency of accounting practices – reducing ability to use- complex LA-
shift material information from FS (Xu, et al., 2017).

Value Relevance
Based on research by Xu (2017), 2 model (residual income and returns-earnings model) - examine
VR of OLC.
In order to test VR – using RIM – 7 variables were used.
Test result in Model 1 – market value of equity – affected by both book value of equity & abnormal
earnings.
Therefore - BVOE & AE – VR with market value.

Model 2: it examines the association – TAE & AE only driven by COL.

: + coefficient – documented with significance – 5 percent level.
: these findings provide evidence – AE driven by COL – part of TAE.
: under AASB 16 COL- indispensable source of AE.

After that, they do – further testing – test result show that AE driven by COL – explanatory power
on market value.
Therefore – provides evidence – AE driven by COL – different VR from AE – under outdated
standard AASB117 (Demper, 2012).
New model formed – coefficient result – negative in previous model.
Change of net income derived – COL doesn’t affect the market value.
Change of required return of equity – negative influence on MV.
The  return expected by market – the  company’s MV will be.

In summary, REM & RIM – used to test for VR.

In REM, findings do not provide persuasive evidence – support VR of COL.
The explanatory power of earnings occur – impact of AASB 16 on market returns – not materially
difference from the earnings under AASB 117.
In RIM – BVOE & comprehensive earnings contribute – effects on AE.
The VR of COL mainly results from – effect on BS rather than change of earnings – in IS
(Demper,2012).

Conclusion: change on BVOE – COL is VR.

: However, changes of earnings do not affect the MV.

Financial Statements
Frecka, T. J., 2008, ‘Ethical Issues in Financial Reporting: Is Intentional Structuring of Lease
Contracts to Avoid Capitalization Unethical?’, Journal of Business Ethics, vol.80, no.1, pp45-59.

Mikkonen, R. S. K., 2016, ‘Value Relevance of Operating Leases – Empirical Evidence from Listed
Companies on Air Transportation Industry’, Master’s Degree thesis, School of Business, Aalto
University, accessed 28/5/2019.

NSW Government 2017, Guidance For AASB 16 Leases, The Treasury, Sydney.

PwC 2016, ‘In Depth A Look At Current Financial Reporting Issues’, PwC.

Xu, W, Davidson, R & Cheong, C 2017, ‘Converting Financial Statements: Operating To

Capitalized Leases’, Pacific Accounting Review, vol.29, no.1, pp34-54.

Value Relevance
Demper, S 2012, ‘Accounting quality of Leases A comparison in value relevance of the lease
accounting models’, Master Accounting, Auditing and Control thesis, Erasmus School of
Economics, Eramus University Rotterdam, accessed 29/5/2019.

Frecka, T. J., 2008, ‘Ethical Issues in Financial Reporting: Is Intentional Structuring of Lease
Contracts to Avoid Capitalization Unethical?’, Journal of Business Ethics, vol.80, no.1, pp45-59.

Mikkonen, R. S. K., 2016, ‘Value Relevance of Operating Leases – Empirical Evidence from Listed
Companies on Air Transportation Industry’, Master’s Degree thesis, School of Business, Aalto
University, accessed 28/5/2019.
Xu, W, Davidson, R & Cheong, C 2017, ‘Converting Financial Statements: Operating To
Capitalized Leases’, Pacific Accounting Review, vol.29, no.1, pp34-54.