PROFESSIONAL TASK, (Group) Part 1: Report (10%), Part 2: Presentation (10%) Spring Semester 2020 Due: Week 7, 5:00pm on Sunday 6 September 2020 This assignment is based on the AASB 16 Leases. This Standard is applicable to annual reporting periods beginning on or after 1 January 2019 (see paragraph C1). Earlier application is permitted for annual periods before 1 January 2020. It incorporates relevant amendments made up to and including 24 December 2018. You can find a copy of this standard in the assignment folder under the Assessments link on vUWS site for Accounting Standards & Governance. Copy of the standard is also available from the AASB website, http://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf According to Australian Accounting Standards Setting Board, AASB 16 introduces a single lessee accounting model and 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. As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability, and also 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 to 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 lessor's 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 entity's exposure to the risks of asset ownership. The prevalence of leasing means that it is important that users of financial statements have a perfect and understandable picture of an entity's 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 lessee's assets and liabilities and, together with enhanced disclosures, will provide greater transparency of a lessee's financial leverage and capital employed.

Requirements:

AASB 16 was released in February 2016 and is applicable to annual reporting periods beginning on or after 1 January 2019. Assume that an investor from Japan had approached you at Deloitte Limited seeking advice on the effects of AASB16 on Air New Zealand Limited and Qantas Limited financial statements for the period 2019 if these firms adopt the new leasing standard. You are to assume that all aspects of the financial statement will be same as 2018 except the effect of the AASB 16. Deloitte is Auditors for Air New Zealand Limited and KPMG is Auditors Qantas for the financial year 2018/2019. 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 Deloitte, prepare 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 2019 for Air New Zealand 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 some of the implementation and ongoing cost for these airlines relating to leasing?

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 2018 Annual Report (as 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 that you have used.

4. Discuss these two companies environmental and social performance for the year 2019?

5. Comment on the two companies' corporate governance instruments.

6. Evaluate whether overall, AASB 16 would result in reporting that would be more useful to financial statement users of these two companies?

7. Summarise and provide your conclusion for the investor who is from a non-accounting background.

In your report make sure you consider the relevant specific technical and theoretical issues relating to AASB 16 from your investors perspective. You are also required to consider the theoretical implication of accounting information produced from the perspective of your investor.