Standard of Lease IAS 17-Free-Samples for Students-Myassignment

Question: Criticise the extent to which the discussion on practical implications of new accounting for leases presented by Churyk, Reinstein and Lander (2015) considers two fundamental characteristics of financial information stated in the AASBs Framework for Preparation and Presentation of Financial Statements. Answer: Introduction: The present study is based on the current lease standard IAS 17 which has been surrounded by criticism for resulting in unfaithful accounting where the comparability amid the commercial firms is not clear. With the objective of overcoming the issue, the IASB and FASB have undertaken the decision of presenting the new lease standard. As stated in the exposure draft of the new standard, the most obvious modification is that the distinction amid the operating and finance lease will be removed which states that all the lease transactions would be represented in the balance sheet (Warren, 2016). Such proposal has been surrounded by criticism since it will be having consequences for companies. The objective of the current study is to understand the consequences and criticism facing the new lease standard that would have impact on the companies making the use of the IFRS and to understand if the companies have performed any preparations. Discussion: Leasing is internationally considered as the element of source of financing and hence, lease accounting standards of highest quality is required. Presently, all the listed companies are required to follow the rules of the accounting standards that is issued by the international accounting standard board. IASB is considered as an organization whose chief purpose is to create a solitary set of high excellence and internationally recognized reporting standard known as IFRS (Lim et al., 2014). When IASB and FASB together launched the project of convergence in 2002 a significant step was taken towards the global international harmonization of the accounting. IAS 17 categorizes the lease as the either operating of the finance. The alteration among the two leases is that the business lease results an asset and a liability on the balance sheet whereas the operating lease is solitary revealed as the expenditure in the footnotes. The finance lease might be equated to the debt financed purchased while the operating lease could be equated to the consistent rental contract (Cheng, 2015). The IAS 17 enables the companies to assess the lease transactions themselves to classify the contract of lease. IASB lay down the guidelines regarding the recognition of the finance lease. But the criteria is considered to be ambiguous and to achieve the precise organization they could be exploited. This is probable to incur with the present standard of lease as the businesses that have inducements to categorize lease agreements as the operating instead of finance in the exposure draft (Barone et al., 2014). Therefore, by classifying lease contracts as the operating, companies will be able to get assets while maintaining an unaffected structure of debt and hence make the organization seem financially sturdier. Though every companies makes the use of the leasing as the means of obtaining access to the assets, they kind and the amount of assets which they lease along with the terms and structure of these contracts vary considerably. For instance, a proficient services firm leases cars and business offices, utilities of the company etc. all have different characteristics terms, regulatory frameworks, risk and economies (Collier, 2015). As an outcome of this different implications might originate for different industries at the time of adopting new lease standard. The proposed changes that has been bought in the lease accounting states that financial users will be able to remain dependent on the entitys leasing transactions. However, the changes in the lease accounting is considered to be controversial topic since there are probable consequences for the companies implementing IFRS (Osei, 2017). On introducing the new lease standard, all the lease transactions particularly the short term leases will result in right to use asset and the liability as well. As a consequence of this, the balance sheet of the impacted companies will increase and will offset the changes on the vital financial ratios. Such kind of consequences have been investigated prior to the publication of the exposure draft. Commercial firms having substantial amount of operating leases might therefore be anticipated to have their balance sheets and the vital financial ratios to be impacted by the introduction of the new lease standard. In the recent study of Gimbar et al., (2016), a further evidence have been portrayed that a capitalization of the operating lease would result in essential impact on the vital financial ratios. Nevertheless, companies have noticed that the consequences would be highly restricted to the retailing industries. The reason behind this is that retailers generally lease large sum of property. Cheng, (2015), has investigated exposure draft and has reported that lower turnover ratio, lesser return on the capital and increase in the lower debt to equity ratio could create an impact on the abilities of the companies to receive a bank financing. In the comment letters issued to the IASB and FASB, impacted companies have stated their concern regarding the new lease standard. In less than the period of four months following the publications of the exposure draft a large number of comment letters were received. Overall, negative criticism were stated towards the change. The cost of leasing would ultimate lead to an increase and might outweigh the benefits (Riley Shortridge, 2013). Concerns were issued regarding the worsening financial ratios, that might decorate the rating of the company and would become harder for the companies to receive credits and undertake the investments. Indeed, the main criticism concerning the new lease standard have placed emphasis on the capitalization of the operating lease since this would increase the structure of debt and balance sheet of the companies. As stated by Grenier et al., (2015), it is expected to have an increase in the balance sheet by 100 per cent. This would represent that the companies might have to negotiate the current structure of debt covenants to exclude the contracts of lease. Additionally, organizations have stated their concerns regarding the new lease standard as it would make it harder to receive credits. There has been a discussion regarding inclusion of the representative in the lease agreements on the balance sheet. Criticism has also been pointed in the direction of the short-term lease. Some firms have believed that the existing bright lines in the classification amid the operating and finance will be replaced by the new one since firms will start curbing the terms of lease so that it can take advantage from the short term lease that corresponds to the present operating lease (Marshall, 2016). Auditors have criticised the fact that the lease-term must decide whether or not the asset is identified on the balance sheet. As an example the auditors have represented that absurd consequences of the short term lease would have consequences on the financial statement. Numerous companies have stated their concern that the new lease standard would change the behaviour of lease and some assets would instead be purchased (Lantto, 2014). Nevertheless, it was reported that organizations would continue their activities of leasing that is unaffected of the new standard of lease, this is because lease reasons comprise of the economic nature along with the optimization of the cash flows and flexibility. Furthermore, organizations have stated their criticism on the new standard of lease because this would lead to an increase in the administrative burden in a considerable manner. Efforts made in the educations of the new standard of lease, new system of IT, changes in process system and increase amount of expenditure in the consultant fees is considered to be the common examples. This is additionally supported by the Bohuov, (2015), that have criticised the new standard of lease for being very complicated. It has been arguably put forward that with large number of lease agreements, companies would have to invest large sum in the new system of IT. This would also result in increased amount of time management because more detailed estimations concerning the liability of lease and right to use the asset should be conducted in respect to IAS 17. Nevertheless, the standard of lease has also received comments of positive nature. According to the Hewlett-Packard (HP) have admitted that currently there prevails an issue with the IAS 17 and the classification of the lease contracts have been done in an unfaithful manner. As stated by HP, it is encouraged to alter the lease accounting but instead by improving the current standard. As stated by Grenier et al., (2015) in the leasing paper have bought forward the argument by stating that the changes in the lease accounting is motivated but also removes the subjective elements. However, in contrast to the HP, he agrees with the IASB that a completely new standard is needed. Conclusion: Replacing the present standard of lease, IAS 17 eliminates the likelihood for the firms to select among the operating leasing and finance leasing. In the forthcoming time, all the leases would be categorized as finance, that suggests that the lease would be identified as the asset and the liability on the balance sheet. The changes concerning the lease standard is essential to attain the better amount of comparability amid the businesses and lessen the misuse of the rubrics of accounting. Though, the procedure of setting standard has been characterised by the disagreement, criticism and postponements which makes that replacement of IAS 17 is considered to be debated subject. Reference list: Barone, E., Birt, J., Moya, S. (2014). Lease accounting: a review of recent literature.Accounting in Europe,11(1), 35-54. Bohuov, H. (2015). Is Capitalization of Operating Lease Way to Increase of Comparability of Financial Statements Prepared in Accordance with IFRS and US GAAP?.Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis,63(2), 507-514. Cheng, J. (2015). Small and Medium Sized Entities Managements Perspective on Principles-Based Accounting Standards on Lease Accounting.Technology and Investment,6(01), 71. Collier, P. M. (2015).Accounting for managers: Interpreting accounting information for decision making. John Wiley Sons. Gimbar, C., Hansen, B., Ozlanski, M. E. (2016). The effects of critical audit matter paragraphs and accounting standard precision on auditor liability.The Accounting Review,91(6), 1629-1646. 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. Lantto, A. M. (2014). Business involvement in accounting: A case study of international financial reporting standards adoption and the work of accountants.European Accounting Review,23(2), 335-356. Lim, S. C., Mann, S. C., Mihov, V. T. (2014). Market Recognition of the Accounting Disclosure and Economic Benefits of Operating Leases: Evidence from Borrowing Costs and Credit Ratings. Marshall, D. (2016).Accounting: What the numbers mean. McGraw-Hill Higher Education. Osei, E. (2017). THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB), AND THE INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) SINGS SIMILAR TUNE: COMPARING THE ACCOUNTING TREATMENT OF NEW IFRS 16 WITH THE IAS 17, AND THE NEW FASB MODEL ON LEASES.Journal of Theoretical Accounting Research,13(1). Riley, M. E., Shortridge, R. T. (2013). Proposed Changes to Lease Accounting under FASB's Exposure Draft.The CPA Journal,83(6), 28. Warren, C. M. (2016). The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16).Property Management,34(3).