According to Australian Accounting Standards Setting Board, AASB 16 introduces a single lessee accounting model. It requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments. A lessee measures right-of-use assets similarly to other non-financial assets (such as property, plant and equipment) and lease liabilities similarly to other financial liabilities. Consequently, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability and classifies cash repayments of the lease liability into a principal portion and an interest portion and presents them in the statement of cash flows applying AASB 107 Statement of Cash Flows. Assets and liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. AASB 16 contains disclosure requirements for lessees. Lessees will need to apply judgement in deciding upon the information to disclose to meet the objective of providing a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee. AASB 16 substantially carries forward the lessor accounting requirements in AASB 117 Leases. Accordingly, a lessor continues to classify its leases as operating leases or finance leases and account for those two types of leases differently. AASB 16 also requires enhanced disclosures to be provided by lessors that will improve information disclosed about a lessors risk exposure, particularly to residual value risk. Leasing is an important activity for many entities. It is a means of gaining access to assets, of obtaining finance and of reducing an entitys exposure to the risks of asset ownership. The prevalence of leasing means that it is important that users of financial statements have a complete and understandable picture of an entitys leasing activities. The previous accounting model for leases required lessees and lessors to classify their leases as either finances leases or operating leases and account for those two types of leases differently. That model was criticised for failing to meet the needs of users of financial statements because it did not always provide a faithful representation of leasing transactions. In particular, it did not require lessees to recognise assets and liabilities arising from operating leases. Accordingly, the International Accounting Standards Board (IASB) and the US national standard-setter, the Financial Accounting Standards Board (FASB), initiated a joint project to develop a new approach to lease accounting that requires a lessee to recognise assets and liabilities for the rights and obligations created by leases. This approach will result in a more faithful representation of a lessees assets and liabilities and, together with enhanced disclosures, will provide greater transparency of a lessees financial leverage and capital employed.200974 Accounting Standards and Governance Professional Task: Part 1: Report : Autumn 2021 Page 2 of 6 Requirements: AASB 16 was released in February 2016 and applies to annual reporting periods beginning on or after 1 January 2019. Assume that an investor from Singapore had approached you at KPMG seeking advice on the effects of AASB 16 on South32 Limited and Newcrest Mining Limited financial statements for the period 2020 for these firms adoption of the new leasing standard compared to the financial period 2019. KPMG is Auditors for South32 Limited, and EY is Auditors Newcrest Mining Limited for the financial year 2020. You are required to take the role of business advisor/Analyst for the purpose of providing a detailed report based on the following specific questions relating to AASB 16 that the investor is seeking a report for. As an advisor/Analyst at KPMG, write a report addressing the following questions that the investor has asked your firm for advice;

1. As the auditor for the financial statements for the year ended 2020 for South32 Limited, are there regulation, restrictions or disclosure requirements etc. that has implications for your firm if you provide the requested advice. If so, please discuss the requirement and how you would resolve it.

2. What are the changes and costs relating to the implementation and ongoing cost for these mining companies relating to the requirements of AASB 16?

3. Calculate, compare and discuss the effect of AASB 16 on the following for the two companies. a. balance sheet, income statement, cash flow statement, and notes b. cost of borrowing, debt covenants and regulatory capital requirements c. key financial metrics: Leverage (gearing), Current ratio, Asset turnover, Interest cover, EBIT / Operating profit, EBITDA, EBITDAR, Profit or loss, EPS, ROCE, ROE, Operating cash flow and net cash flow. (Note: Use 2019 Annual Report (as a base year) for both companies for comparison. Attach your ratio calculations, including any formula for both companies in appendix 1 and attach as Appendix 2 extract from the financial statements you used.

4. Is there any relief available to companies implementing AASB 16 due to the COVID-19 pandemic?

5. Discuss the environmental and social performance of these two companies for the year 2020?

6. Comment on the two companies corporate governance instruments.

7. Please explain whether the implementation of AASB 16 has resulted in more useful information for the financial statement users of these two companies?