Qantas Group Year-End Financial Report

Accounting Standard AASB117, Leases, was made by the Australian Accounting Standards Board on 15 July 2004 under the section 334 of the Corporations Act 2001. The objective of AASB117 is to prescribe appropriate accounting policies for the lessees and lessors in order to assist entities in classifying leases as operating or finance leases and disclosure to apply in relation to leases. AASB 117 includes economic life, fair value, finance leases, operating leases and also hire purchases contracts which contains a provision giving the firer an option to acquire title to the asset upon the fulfilment of agreed conditions. The substance of the transaction rather than the form of the contract can define a lease whether it is a finance lease or an
The asset and liability are equal to the present value of the minimum lease payments and guaranteed residual value is recorded at the beginning of the lease. Under sale and leaseback arrangements, the gains and losses arouse are deferred and depreciated over the lease term. Capitalised leased assets are depreciated on a straight-line basis over the period in which benefits are expected to arise from the use of those assets. Lease payments are allocated between the reduction in the principal component of the lease liability and the interest element. The interest element is charged to the Consolidated Income Statement over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the lease liability. Fully prepaid leases are classified in the Consolidated Balance Sheet as hire purchase assets, to recognise that the financing structures impose certain obligations, commitments and restrictions on the Qantas Group (2011
As the lease expires, the operating lease will have a higher total expense (2012). Given the discretion, many firms prefer operating leases, since they hide the potential liability to the firm and understate its effective financial leverage. For the classification, there is a higher total expense which interest plus depreciation at the beginning of the lease period with a capital lease due to the higher interest payments. There are lower operating expenses with a capital lease since part of the expense is interest payment. To prevent firms from constructing lease arrangements, the lessor and the lessee have very different incentives, since the arrangements that would provide the operating lease definition to the lessee are the same ones under which the lessor cannot claim depreciation, interest, or other tax benefits on the lease. In lessor classification of long-term land leases stated that for a finance lease, ratios can increase asset value resulting in a lower asset turnover and return on assets (Franzen, Rodgers & Simin 2009). The leverage and liquidity ratios would be affected by the addition of the liabilities which both are current and noncurrent. As a finance lease adds current and long-term