Changes in Accounting Principles: The International Accounting Standards Board

Your first attempt at generating the financial statements is commendable. I have outlined and included an analysis and recommendation to deal with each issue you identified in your notes. Attached is an Excel file in which you will find the correcting entries, the required adjustments to the draft Financial Statements and additional details related to calculations for the lease agreement.

The reason we want to capitalise the lease commitments is that reporting under operating assets leads to substantial amounts of off-balance-sheet assets and liabilities. Hence, it is difficult to compare financial statements between two similar companies but use different accounting methods for essentially the same transaction.

Dhaliwal, Dan, 2011. The Impact of Operating Leases on Firm Financial and Operating Risk.. Journal of Accounting, Auditing & Finance., [Online]. Volume 26 Issue 2, 151-197.. Available at: http://web.ebscohost.com.simsrad.net.ocs.mq.edu.au/ehost/detail?vid=3&sid=9317bb11-bcea-4e15-99f8-3930c890a726%40sessionmgr111&hid=103&bdata=JnNpdGU9ZWhvc3QtbGl

At the lease commencement, finance leases are capitalised at the fair value of the leased property, otherwise the present value of the minimum lease payments if lower (MHI, 2014). Other short term and long term payables include the relevant rental obligations and net of finance charges (MHI, 2014). Every lease payment is apportioned between the liability and finance charges (MHI, 2014). The finance cost is indicated in the comprehensive income statement for the lease period as well as to generate a constant periodic rate of interest on the remaining balance of the liability for each period (MHI, 2014). During the lease term, the depreciation is considered for the useful life of the asset such as the property, plant and equipment assigned under finance leases (MHI, 2014). The portion of the risks and rewards of ownership are persevered by the lessor are categorized as operating leases for leases (MHI, 2014). For the period of the lease, all payments made under operating leases less any incentives from lessor are indicated in the comprehensive income statement on a straight-line basis (MHI,

Leases are classified into two main types; finance lease and operating lease. The impact of each type of lease on the company’s annual report is different. When accounting for finance leases, for example, the concerned lessee makes recognition of the asset that has been leased in the statement of financial position or balance sheet and consequently charges all other finance charges including the depreciation charges relating to the leased asset on to the statement of income or profit and loss

No, the junior accountant’s analysis is not correct in classifying the lease as an operating lease in accordance with IFRS. Whether or not a lease is classified as a finance or an operating lease depends on if all of the benefits as well as risks of ownership have been shifted from the lessor to the lessee.

One aspect of this can be seen in the simplified break down of the qualifications in determining between an operating lease and a capital lease. This is very important since the determination of a lease agreement will decide on whether an asset and liability are included on the balance sheet or if it should only be footnoted within the financial statements. A current proposal for lessees, would require the recognition of a right-of-use (ROU) asset and a lease liability in the balance sheet, regardless of whether the lease would have been considered a capital or operating lease

As you are aware on February 26, 2016, the FASB issued standard No. 2016-02, Leases (Topic 842) to the current lease standard. “The new leases standard will increase transparency and comparability among organizations that lease buildings, equipment, and other assets by recognizing the assets and liabilities that arise from lease transactions”. Under the new standard, leases with terms of greater than 12 months be shown as a right-of-use lease asset and a leased liability on the balance sheet. The key disparity between the current Generally Accepted Accounting Principles (“GAAP”) and the new Topic 842 is that the lessee should recognize right-of-use leases as assets and lease liabilities, for those leases that have a and were

The Accounting Standards Update requires improved presentation and disclosures to enable the not-for-profits issue out

Based on the literature review, many companies, especially construction companies, will be greatly impacted by the changes in lease accounting. A company that once seemed completely healthy will be viewed entirely differently by investors after all of their lease liabilities are moved onto the balance sheet. It is not a fair assumption to decide that the company is less well off after the change is enacted for all public companies. Based on this idea the hypotheses concerning the well-being of companies who are forced to capitalize their operating leases are as follows:

it provides a better indication of ability to generate cash flows than the cash basis.

Lease reporting regulations are contained in the GAAP FAS 13 and IFRS, IAS 17. The primary differences entail the regulations on the leveraged assets, discount rates awarded to the lessee, leaseback transactions under capital leases and operating leases as well as the profit or losses (Ashok, 2014). Therefore, a company should explore the options to come up with a workable and convenient plan corresponds to the strategic management objectives. Taking into consideration the prevailing circumstances, the CFO should instigate a comprehensive lease policy that to guide decisions in lease assets and the effect of such in the company portfolio. The principal aim should avoid circumstances that can lead to the negative listing.

Recognition and measurement of leases is an important part of accounting for leasing. Many companies and organizations rely on leasing as a means of acquiring assets without actually owning the asset. Companies often lease land and buildings, company vehicles like trucks for construction, and equipment for manufacturing or a business; like computers, copiers, and printers. Leasing allows for companies to stay in the game when it comes to new technology, so that when new technology comes out, companies will be able to start a new lease with new equipment. While leasing is a popular way of acquiring assets, it’s possible that companies and organization will pay more money for a lease then if the asset had been purchased. Leasing of

The international Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) initiated a joint project on accounting for leases in 2006, and revised the rules and made an explosion draft in 2014. This exposure draft shifted accounting for lease from an ‘ownership’ model to a ‘right-of-use’ model. The current accounting model report long-term leases as either capital or operating leases, depending on the leases contract’s specific terms. This rule helps company to avoid the assets and liabilities off the balance, whereas the new proposal require the leases of equals or more than one year to be capitalised. This change would influence the financial position and statement due to most operating leases become on-balance-sheet.

According to Steve Collings (2010), the accounting treatment of leases has presented a lot of problems over the years for the particular profession. Problems are observed in the way some leases are being treated in a business’ income statement and statement of financial position. Although, as we are going to expand more on that, the major problem of accounting for leases according to Collings (2010), is the manipulation of financial statements by incorrectly categorizing ‘finance leases’ as ‘operating leases’. The main purpose of the essay is to discuss why accounting for leases has been so controversial and whether the new standard (IFRS16) will give a more meaningful picture of companies’ financial position for lessees.