This case explores how Cathay Pacific, the world’s eighth-largest carrier of international passengers, deals with the new accounting standard, namely, HKFRS 16 Leases (which superseded the prior HKAS 17) as mandated, effective 1 January 2019.
For lessee accounting, the new standard adopts a singular right-of-use model that applies the same accounting treatment universally to all leases (with few exceptions), while the prior standard used a dual model that required distinct classification of operating and finance leases with different accounting treatments. Companies that enter lease arrangements to access assets are affected by the new lease standard in varying degrees. In particular, the airline industry—with heavy reliance on leases for aircrafts—is one of most affected in terms of financial metrics.
The case seeks to highlight the discussion surrounding the implementation of the new standard. Students will tackle practical questions about the differences between HKFRS 16 and HKAS 17, and how the implementation of the new standard affects Cathay Pacific’s financial position, performance, and disclosures in the financial statements.
On completion of the case, students will be able to:
- Describe the standard-setting process of IFRS 16.
- Contrast IFRS 16 with IAS 17, particularly in lessee accounting.
- Analyze the financial impacts on lessees like Cathay Pacific, in relation to the adoption of the new lease standard.
- Assess the financial implications of residual value risks for lessees like Cathay Pacific.
- Explain how lessees like Cathay Pacific might react in order to minimize the adversities brought by the new standard.