Discuss the Concerns Raised by Users Regarding to the Usefulness of Aasb 117

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AASB 117 Leases requires lessees to classify leases as either finance leases or operating leases. The accounting treatment required under each approach is very different and this has raised concerns by investors and other financial statement users regarding the usefulness of the information provided. This essay will critically discuss and the criticisms and usefulness of lease accounting treatment. It will also examine lessee firm’s responses to Australian Standard 117 Accounting for Leases.

Definition of capital and operating lease

AASB 117 provides the current rules for leases. In general terms, the lessee classifies leasing transactions under one of two categories. The current state of practice requires the …show more content…

Whether lease should be classified as finance/capital leases or operating leases, has essential influences on other issues such as capitalisation of finance/capital leases and disclosure of operating leases by lessees. Without a clear distinction between a finance/ capital lease and an operating lease, it is unlikely that the lessee be required to capitalise the lease. This has led to inconsistent accounting for arrangements that meet the definition of a lease and similar arrangement that do not.

According to AASB 117, the operating lease structure is a form of off-balance sheet accounting, which means the lease obligation is not reported as a liability on the balance sheet. Critics claims that as a result of desirability of operating lease classification, lease parties commonly structure leases in such a way to avoid capital lease accounting by a thin margin and uses it as a source of off-balance-sheet financing This is a source of unrecognised financing and it can be difficult for users to understand. Moreover, the adjustments are inconsistent and frequently understate the lease obligations.

Furthermore, the lack of transparency caused by current lease classification rules and the resulting lease structuring that occurs to avoid meeting those rules creates significant problems for users in assessing the true financial condition and risk of companies. It can even affects naively calculated debt-equity ratios, the “ footnote only” disclosure and further

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