Reference no: EM132643716

The new leasing standard, AASB 16, will have a significant impact on the financial statements of organisations that contain a material level of operating leases (e.g. retail outlets such as Myer and David Jones). Under the new standard, operating leases will need to be included on the financial statements and many organisations will be recognising these leases for the first time.

You are the manager within an accounting and auditing firm and one of your clients (an ASX listed manufacturing business) has requested your advice on implementing the new lease standard for the first time. The client leases all the equipment that it uses for its manufacturing operations. The lease agreements were previously accounted for as operating leases under the old lease standard (AASB 117).

The client organisation has also requested your advice on the potential impact of the new standard on existing contracts, specifically remuneration and lending contracts. The executive managers within the client organisation receive bonuses based on key metrics such as Return on Assets and Earnings per Share. The client also has debt contracts with lenders, which include maintaining the debt-to-equity ratio at a level less than, or equal to, one.

Problem 1: Drawing on existing theory, predict the potential impact of the new leasing standard on:

a. share price

b. top management remuneration

c. debt covenants.

Problem 2: Discuss what action, if any, the client organisation could take to prevent any adverse consequences associated with the new standard.