CO5123 SP22 2015 ASSIGNMENT
Since the adoption of International Financial Reporting Standards (IFRS) in Australia on 1 January 2005, there has been much debate over the development and nature of IASB Leases. Many drafts and revisions to the standards have occurred since 2009.
You are required to read the article attached, sourced from the Sydney Morning Herald (22 April 2015 You will be assigned one of the companies, identified in the article, by your lecturer. The article identifies the issues that some Australian companies will face if the proposed accounting rules for leases are enforced. The company you have been assigned will be published on LearnJCU under the
Assessment tab during Week One of the trimester and is NOT open for discussion or review.
You will be required to conduct extensive and wide research on the history of leases in the Australian Accounting Standards. As part of your research, you will be required to read the Annual Financial Report for your assigned company for 2014 to identify how leases are currently recorded in the financial reports. You will be required to analyse the financial reports in relation to the impact the accounting rules for leases will have on the financial statements of the company. As a result of these changes, you will also need to discuss the non--financial outcomes that may occur as a result of the financial changes.
Your essay must include:
• Evidence of your understanding of lease arrangements and the impact on financial reports, including a demonstration of operating versus financial leases.
• Summarise the company you have been assigned, including the value of leases as currently listed in the financial reports.
• Research on the impact that the change of accounting rules for leases might have on the company you have been assigned.
• A summary of the short and long term impacts of the changes to reporting for leases (e.g. financial statements and gearing ratios).
• You should also be able to demonstrate your understanding of lease arrangements for the industry of your company and the lifecycle and stage of the lease.
• Demonstration of the understanding of leases and how they are recorded have provided
such an issue.
Details and Requirements:
Individual essays are to be submitted.
• A critical analysis which demonstrates your understanding of the reasons behind the issue of leases and the subsequent impacts on the financial reports of a business is essential to meet the minimum pass grade for this essay. Copy and paste from any resource is not acceptable for submission. Evidence of the use of any word substitution programs may result in a fail grade.
• This essay is expected to be of a Masters standard and carries a weighting of 25% as per subject outline. Please ensure that you have attached the School of Business Assignment
• You will be required to research widely, using scholarly articles and journals to support your argument. You should be using Google Scholar to source current publications to support your arguments. Providing only basic definitions does not address the criteria of the essay. The assessment criterion (marking rubric) is available in Section 6 of subject outline.
• Your essay must contain an ‘Abstract’. Whilst this is not always the case, it is a skill worth developing! There is a word limit of 1,500 words excluding abstract, appendices and reference list.
• The essay should be typed and APA referencing is to be used. Your essay MUST contain both in--text citations and a detailed reference list. It is strongly advised that you seek assistance from Level 2 for APA referencing and Level 8 for proofreading and grammar checks prior to submission.
• Two drop boxes have been established on LearnJCU. The ‘Draft’ version is for you to check your work in terms of plagiarism. The ‘Final’ version is for the final submission of your essay which is the one that will be marked (See Figure below and LearnJCU). Any assignments with similarities will be immediately open to formal review.
• Arial font, font size 12, 1.5 line spacing
• Header containing your student number, name, subject code and name on every page
• Signed Assignment cover page, clearly acknowledging that the work is your own.
• Essay format (see Level 2 if you are unsure of the required format)
• Submitted via safeassign by the due date. There will be a draft safeassign box where you can check your safeassign report prior to final submission
Article from The Sydney Morning Herald
Retailers face multibillion-dollar hit from proposed lease accounting changes
Published: April 22, 2015 - 5:59PM
Australia's fastest growing retailers face a hit to their bottom line profits under proposed accounting rules that will force them to bring more than $40 billion worth of leases onto their balance sheets for the first time.
Under the latest changes to lease accounting rules put forward by the International Accounting Standards Board, retailers such as Woolworths, Wesfarmers, Myer, David Jones, JB Hi-Fi, Harvey Norman, Specialty Fashion and Premier Investments will have to calculate the net present value of future lease commitments and recognise them as debt on their balance sheets.
Instead of recognising rent payments as costs incurred, retailers will have to expense theoretical amortisation and financing costs. This will boost earnings before interest, tax, depreciation and amortisation but will reduce pre-tax and net profits, as the amortisation and financing costs will exceed rental payments, especially for faster growing retailers with relatively new leases.
Leases will also be treated as assets, but under the IASB's draft proposal, which was released last month, leases will be amortised faster than capitalised obligations, reducing shareholder equity.
According to a report by Morgan Stanley, the impact on retailers will be -considerable-, blowing out gearing levels and reducing return on capital employed, but will vary from retailer to retailer.
Morgan Stanley says retailers with significant and long-term lease liabilities, including Myer, apparel retailer Specialty Fashion, and The Reject Shop, are likely to more affected than retailers such as Kathmandu and Fantastic Furniture.
Retailers that have grown by opening a significant number of new stores in recent years and are therefore early into lease programs – such as Lovisa and Super Retail Group – will be more affected than retailers with older leases.
-Once we get clarity on lease structures and how far they are through their lease programs we'll be able to assess who wins and who loses,- said Morgan Stanley analyst Tom Kierath.
Retailers would have to capitalise leases of more than 12 months duration, but only up until the first -break- clause, potentially prompting more retailers to enter into rolling lease agreements rather than longterm leases.
KPMG audit partner Patricia Stebbens said the proposed changes would boost gearing ratios, forcing some companies to renegotiate debt covenants with bankers. -They should be having that conversation earlier,- Ms Stebbens said.
Myer, for example, has net debt around $340 million but the net present value of its lease liabilities is estimated to be around $2.2 billion, so its total debt would jump to $2.5 billion. Woolworths has net debt of $3 billion but the NPV of its leases is around $15 billion, so total debt would rise to $18 billion. Wesfarmers, which owns Coles, Bunnings, Kmart, Target and Officeworks, has $4 billion in net debt and the NPV of its lease liabilities is $12 billion.
-Investors are aware of this [change] but not to the extent they should be,- said Mr Kierath.
The International Accounting Standards Board first proposed bringing operating leases onto balance sheets seven years ago to give investors and creditors a clearer picture of the size of corporate debt after a spate of corporate collapses such as Enron.
The IASB was forced into a rethink after a backlash from major retailers including Woolworths and Wesfarmers, who denounced the original proposals as complex and costly.
The IASB completed its deliberations last month and plans to publish the new rules before the end of 2015.
Australian Accounting Standards Board research director Angus Thompson said the new regime was likely to come into force from January 2018 at the earliest, giving corporates, their accountants and shareholders plenty of time to prepare.
-With all these things there are differing opinions and people have opposed what is happening, [but] there are other people who want to see good transparency who have generally supported it,- Mr Thompson said. -I think it will improve the level of transparency around gearing.-
-For the average entity that has material operating leases it will gross up the balance sheet on both sides – there will be more assets and more liabilities instead of just expensing,- he said. -The impact on income will be very entity specific.-
The proposed changes may prompt retailers to disclose more details about their lease liabilities and agreements ahead of the introduction of the new standards.
This story was found at: http://www.smh.com.au/business/retailers-face-multibilliondollar-hit-from-proposed-leaseaccounting-changes-20150422-1mqjx9.html