Executive
Summary

 

Leasing helps companies to access necessary equipment they
need for the business’ growth, it also provides a substitute to paying upfront
for the asset’s cost.  There are two types of leasing which are finance
lease as well as an operating lease. This report will discuss the current
lease agreement of IPH ltd in accordance with AASB 117.

 

IPH Limited’s Current Lease Agreement

 

IPH Limited has complied with various requirements in the current
standard which is AASB 117 regarding leases. Such as the requirement for
businesses to recognize the lease an expense in the period and present or
disclose the full amount of the future minimum lease payments that are
predicted to be obtained under subleases that are not cancellable at the end of
the reporting period.

 

 

AASB
16 Leases

 

After
January 1 2019, IFRS 16 will operate to replace AASB 117 regarding to annual
reporting, with earlier application allowed, if IFRS 15 is also applied (AASB
117 Leases, 2015).

The reason for changes or the aim of
AASB 16 is to have reporting information that has a faithful representation
regarding lease transactions, as well as to provide the financial statement’s users
a basis to analyze the timing, amount as well as the uncertainty of the flows
of cash that arise from the leases (IFRS, 2016).

 

 

 

 

 

 

 

Potential impacts of new standard on
the company’s financial position and financial performance

 

Businesses
that are leasing big assets such as the equipment in manufacturing, real
estate, technology, logistics, and various others are expected to be
significantly affected (PWC, 2016). Since IPH Ltd focuses on technology, the
effect of leases various small leases including tablets as well as personal
computers, minor office items and phones may be less because the new standard
will offer an exemption regarding assets with low value, this includes assets
with five thousand dollars or less in value when new. On the balance sheet, assets
with low value that can meet this exemption do not need to be listed or recognized.

However, since IPH Limited is in a leasing agreement for office premises, the
impact of the new standard could be significant.

 

Conclusion and Recommendation

 

Changes of
the accounting standard of the lease could greatly impact lessees’ various
business systems, business processes as well as the business controls. It will
be required for businesses to have more data on their leases than before,
considering the on-balance sheet system in accounting that applies for almost all
the leases. Businesses including IPH Ltd would need to have a cross functional approach
in terms of implementation, as well as accounting.

 

 

 

 

 

 

 

 

 

 

1.     Introduction

 

Leasing is a broadly used
solution in financing for various types of businesses. Leasing allows
businesses to use and to have access to properties and equipment without having
to incur great cash outflows (N Dickson, 2016)

 

This report discusses the topic of lease with the purpose of analyzing
IPH Ltd’s current lease agreement, followed by a summary of the new rules in
accordance with AASB 16 Leases and the reasons for changes from the current
accounting standard AASB 117. This report will analyze the potential impacts on
the company’s financial performance from the application of the new rules on the
current lease contracts as per the latest annual report, followed by a conclusion and
recommended actions.

 

 

1.1   Company Background

 

 

IPH Limited is focused on the establishment of intellectual
property services. The company is offering various range of services useful for
the protection as well as the management of IP for a wide range of companies, public
sector research organizations, and many more. IPH Ltd employs
very highly skilled group of more than six hundred people in Australia, Singapore,
Indonesia, Hong Kong and many more (IPH Ltd, 2016).

 

 

 

 

 

2.    
IPH
Ltd’s Current Lease Agreement

The Group has arranged bank
guarantees regarding to the commitment of the office premises of $1,853,000 as
stated in their latest annual report as at 30 June 2016 (IPH Ltd Annual Report,
2016).

 

2.1
Presentation and Disclosure

 

IPH Limited has complied with
current standard which is AASB 117 regarding leases. In accordance with AASB
117, it is required for businesses to identify the lease an expense in
the period
and present or disclose the full amount of the future minimum lease payments that
are predicted to be obtained, that are not cancellable at the end of the
reporting period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In their
annual report, IPH Limited has disclosed amount of future minimum lease
payments in terms of non- cancellable operating leases for the period of within
one year, later than one year, as well as for the period of over five years.

 

IPH Limited
has also fulfilled AASB 117 requirement to disclose the overall description of
the leasing arrangement for the lessee’s. This includes disclosing on what
basis the contingent rent payable is decided, as well as the existence or
presence of renewal and purchase choices, escalation clauses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.2 Accounting
Treatment

 

Under AASB
117, lease payments need to be identified as an expense under the basis of
straight line method the lease term, in the exception where a different
systematic basis is more apparent in the time of the user’s benefit (AASB 117
Leases, 2015).

 

IPH Limited
stated this accounting policy in their annual report, they state that contingent
rentals are to be identified as expenses during the period that they are
incurred. During the event in which lease incentives are gained into operating
leases, the incentives will be identified as a liability. The combination of
the advantage of incentives will be put as a reduction of rental expense based
on the straight-line method, excluding where a different systematic basis is more
present in the time where economic benefits are gained from the leased asset.

 

 

 

 

 

3.    
AASB 16 Leases

 

1.1 
Summary of the new rules in
accordance with AASB 16 Leases

 

AASB 16 will
introduce an accounting model for lessee which requires a lessee to identify
asset and liabilities in terms of all leases with a period of over 12 months,
except when the underlying asset has low value. It will be compulsory for a
lessee to acknowledge a right of use asset that represent their right to use the
underlying leased asset as well as a liability of the lease that represent the
responsibility in making lease payments (IFRS, 2016).

 

Under AASB 16, a
lessee is required to separate the right of use asset from other assets, as
well as to separate the lease liabilities from other liabilities when
presenting it in their statement of financial position or when disclosing it in
the notes. Lessees need to also disclose what line items in their statement of
financial position involve the right of use assets. Under AASB 16, it is also
important to separate the presentation of interest expense on the lease
liability from the right of use asset’s depreciation charge in the company’s
statement of profit or loss and other comprehensive income (Deloitte, 2016).

 

In terms of disclosure, under AASB 16, it
is essential to disclose the charge of depreciation for the right of use
assets, the lease liabilities’ interest expense, income gained from the
subleasing of the right of use assets, gain or loss that arise from the
transactions of leaseback as well as from sale, the right of use asset’s
carrying amount and various others. All the mentioned amounts need to be
disclosed by companies for the reporting period. (Deloitte, 2016).

 

 

 

 

 

 

 

 

 

3.2 Reasons for changes from the current accounting
standard AASB 117 Leases

 

 

The aim of AASB 16 is to truthfully
represent lease transactions, to provide users a basis to analyze the timing,
amount as well as the uncertainty of the flows of cash that arise from the
leases. To satisfy this aim, a lessee needs to recognize or acknowledge assets
as well as liabilities that arise from a lease (IFRS, 2016).

 

AASB 16 has some transition requirements
that applies for finance leases that are already existing, which is for it to
be treated continually as a finance lease. As for operating leases that are
already existing, there are options for full or for limited restatement of retrospective
to expose or reflect the AASB requirements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.     Analysis of the potential impacts on the company’s financial
position and financial performance

 

 

AASB 16
could have an effect to nearly all generally used financial ratios as well as
performance. These types of changes could influence loan agreements, the
ratings of credit as well as the cost of borrowing. This could also have an
impact in some other changes in behavior. These effects could lead various organizations
to re consider certain decisions regarding ‘lease vs buy’.

 

Businesses
that are leasing big assets such as the equipment in manufacturing, real
estate, technology, logistics, and various others are expected to be
significantly affected. Since IPH Ltd focuses on technology, the effect of
leases various small leases including tablets as well as personal computers,
minor office items and phones may be less because the new standard will offer
an exemption regarding assets with low value, this includes assets with five
thousand dollars or less in value when new. On the balance sheet, assets with
low value that can meet this exemption do not need to be listed or recognized.

However, since IPH Limited is in a leasing agreement for office premises, the
impact of the new standard could be significant (PWC, 2016).

 

 

 

 

 

 

 

 

 

 

 

 

5.     Conclusion and Recommended Actions

 

 

As per the
new requirement, AASB 16 will approximately eliminate all the accounting for balance
sheet and will also re define various broadly used financial metrics. This
could improve comparability; however, it can also influence agreements, the
ratings of credit, the cost of borrowings as well as the stakeholders’
observation of the company (IFRS, 2016).

 

5.1
Conclusion

 

Changes of
the accounting standard of the lease could greatly impact lessees’ various
business systems. It will be required for businesses to have more data on their
leases than before, considering the on-balance sheet system in accounting that
applies for almost all the leases. Businesses would need to have a cross functional
approach in terms of implementation, as well as accounting.

 

The sooner IPH
Ltd start to understand the effect of the new standard has on the company, the
more prepared the company will be to sort out all the potential risks and
issues to decrease the cost of implementation.

 

 

 

 

 

 

 

 

 

 

5.2
Recommended Actions

 

Under the
new standard, identifying or determining a lease may be challenging especially
for a telecoms entity, in which IPH Ltd is mainly focusing on. The new standard
involves examples of capacity or services vs lease in terms of fibre optic
cable and various examples of services of network. Since IPH Ltd centers around
technology, they need to analyze whether their leases are providing control
over parts of an asset or whether their leases will provide capacity.

 

 

In the separation
process of lease and non–lease elements, telecoms companies would require to
unbundle various element arrangements that are provided to customers. Thus,
they might need the combination of the adoption of the new standard for leases
with the new standard of the revenue recognition that will operate starting 1
January 2018, taking into accounts the interdependencies amongst these two
standards for telecoms/network entities. This process might a way to be
cost-efficient (PWC, 2016).