Woodside Petroleum Limited Financial Reporting In Accordance

Question: Discuss about the Woodside Petroleum Limited Financial Reporting In Accordance With The Requirements Of Australian Accounting Standards (Aasbs). Answer: This particular report seeks to assess and comment on diverse information regarding leases provided in the annual reports of Woodside Petroleum Limited for FY2016 with the requirements of the relevant Australian Accounting Standards (AASBs). Woodside Petroleum Limited is considered to be an Australian petroleum production and exploration firm headquartered in Perth, Western Australia. The company was incorporated in 1954, and it is also considered as the largest operator of gas and oil production in Australia. The new IFRS 16 Leases requirements basically eliminates nearly all off-balance accounting for leases and also redefine many commonly utilized financial metrics such as EBITDA and the gearing ratio (Woodside Petroleum Limited annual reports, 2016: note 117). Under AASB 16, the new IFRS 16 also conveys most leases on the balance sheet for lessees in a single requirement, abolishing the difference that exists between finance and operating leases. Under this particular requirements, the lessee will be required to recognize liabilities and assets for contracts and agreements with terms of more than twelve months and is also realized on the balance sheet (Ahmed, Neel, and Wang, 2013). According to Australian Accounting Standards (AASBs), this new standard will increase comparability and also affect agreements, borrowing costs, credit ratings and stakeholders perceptions towards the company. AASB 16 offers a single lease accounting model and necessitates a lessee to recognize liabilities and assets for all the lease agreements for a period of more than twelve months except the underlying property at a lower value (AASB 101.26). According to Woodside Petroleum Limited annual reports, the lessee is basically required to recognize a right of use of property that outlines its ultimate right to use the asset and a leased liability that represents a liability on the lessor. The lessee is also required to make payments for the leased property as the new IFRS 16 sets out the principles for presentation, measurements, recognition, and exposure of leases. According to AASB 16, the leaser will be needed to state a capital lease as a liability and as an asset at the amount equivalent to the present value at the start of the lease period (Cairns, Massoudi, Taplin, and Tarca, 2011). In this particular case, Woodside Petroleum Limited will be needed to realize any lease agreement like capital lease as a liability and as an asset at the cost equivalent to the present value at the start of the lease period (Annual report note 13). Under AASB 110 Presentation of Financial Statements and AASB Conceptual Framework, the accounting requirement for lessees will be needed to recognize all the leases on the statement of financial position except the short-term leases and also leases that have low costs (Wong, and Joshi, 2015). If Woodside Petroleum Limited leases any asset for a lessor, then it will be required to recognize the leased assets on its balance sheet except for the short-term assets that contain low costs (AASB 101.26). The assets will b e recorded on the balance sheet as an asset, and the lessor company will record the same transaction as a liability on its balance sheet. Difference between lease operating and finance lease A finance agreement is considered to be an arrangement in which the rewards and risks are shifted to the leaseholder with the transfer of the property while operating lease is deemed to be a lease agreement in which rewards and risks are basically not shifted to the leaseholder with the transfer of the property (Riccardi, 2016). A finance lease is a saleable agreement in which the lessor permits the lessee to utilize the property for the maximum measure of is cost-effective life against rental payment that is referred to as finance lease. In a finance lease, the property ownership is basically transferred to the lessee when the lease period expires (AASB 98.90). The finance lease is also considered as a non-cancellable agreement in nature that can only be cancelled if the lessor permits the happening of any contingent event that may affect the asset. Consequently, operating lease is a commercial agreement where the lessor permits the lessee to utilize the property for a period lesser than the profitable life of the property against the rental payments which is referred to as an operating lease (Wong, and Joshi, 2015). An operating lease is basically more like a rental contract because usually rental payments are paid for the use of the property and often charged a rental expense in the income statement in the books of the lessee. According to Woodside Petroleum Limited annual reports, the company leased floating production, helicopters, storage and off-take vessels, supply vessels, land, cranes, computers and office premises as operating lease so as to utilize the assets in their operations. In this case, the company will be required to record the assets as expenses in the income statement on a straight-line basis over the lease period (Grenier, Pomeroy, Stern, 2015). Lease rewards attained are realized in the profit and loss account as part of the total lease expenses. On the other hand, the lessor will record this transaction as an asset on its balance sheet. Woodside Petroleum Limited also leases long-term bank loans from financial institutions under capital lease. In this case, Woodside Petroleum Limited will record the lease as liabilities in its balance sheet and the bank will record the transaction as an asset on its balance sheet (Annual reports, 2016: note 34). In lessees perspective, the potential implication of the adoption of the new AASB 16 on assets is that the lessee firm will be needed to realize the leased asset as an asset on its balance sheet (Albu, and Albu, 2012). Under AASB 110 Presentation of Financial Statements, the right to use the asset will be measured by the lessee at the amount of the lease liability and the ultimate direct costs involved and reported as an asset on the statement of financial position. For example, leasing a helicopter or office premise will increase the company assets a thus will be treated as an asset in the balance sheet. Another implication on debts and liabilities is that the lessee firm will definitely increase its overall liabilities in its balance sheet since the leased property will be recognized as a liability in the financial statements (Annual report note 41). Under AASB Conceptual Framework, the lease obligation will be measured through the present cost of the lease value discounting by the interest rate implied in the lease agreement. For example, utilization of long-term loans by the company will decrease the firm profit because of the interest paid to the bank. Under lessees perspective, leverage ratio will increase because it is usually measured as net debt/value of the firm. A higher leverage ratio will result in a higher value of the company (Chalmers, Clinch, and Godfrey, 2011). Accounting based on debt contract will be affected by the new AASB 16 because growth in the accounting based debt agreements will increase the firm value (AASB 101.26). According to AASB 16, the value of the company will increase with the net debt while the value of equity remains constant (Wong, and Joshi, 2015). The potential implications of adopting new AASB 16 lease on profit and expenses is that the firm will experience an increase in obligations because of the finance leases such as long-term loans. Increase in company obligations negatively affects the revenue as most of the attained profits will be used to repay some of its due obligations. Bibliography Ahmed, A.S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence.Contemporary Accounting Research,30(4), pp.1344-1372. Albu, N. and Albu, C.N., 2012. International Financial Reporting Standards in an emerging economy: lessons from Romania.Australian Accounting Review,22(4), pp.341-352. Cairns, D., Massoudi, D., Taplin, R. and Tarca, A., 2011. IFRS fair value measurement and accounting policy choice in the United Kingdom and Australia.The British Accounting Review,43(1), pp.1-21. Chalmers, K., Clinch, G. and Godfrey, J.M., 2011. Changes in value relevance of accounting information upon IFRS adoption: Evidence from Australia.Australian Journal of Management,36(2), pp.151-173. Grenier, J. H., Pomeroy, B., Stern, M. T. 2015. The effects of accounting standard precision, auditor task expertise, and judgment frameworks on audit firm litigation exposure.Contemporary Accounting Research,32(1), 336-357. Riccardi, L., 2016. Accounting Standards for Business Enterprises No. 3Investment Real Estates. InChina Accounting Standards (pp. 25-29). Springer Singapore. Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia.Australasian Accounting Business Finance Journal,9(3), p.27. Woodside Petroleum Limited annual reports, 2016. Retrieved from https://www.woodside.com.au/Investors-Media/announcements/Documents/01.03.2017%20Annual%20Report%202016.pdf