CORPORATE FINANCIAL REPORTING (accounting knowledge require) - Essay Example

(IFRSF 2011) These issues have to be resolved in the next Board Meeting for the Finance Department to be able to finalize the company's financial statements for the year 2010. The following is a brief discussion of the points that have to be considered: Classifications of Leases As an agreement that binds the lessor to grant the lessee the right to use an asset for an agreed length of time, a lease can be classified as either a finance lease or an operating lease. While a finance lease passes on to the lessee practically all the risks and rewards that go with ownership of the asset, an operating lease clearly declares that ownership of the asset is retained by the lessor. . It should further be noted that lease classifications are set at the inception of the leases.

(IASCF 2009) Preference for Operating Leases Operating lease is the classification that is often preferred by a company management. Many companies through the years have opted to record the lease agreements that covered their automobiles, aircrafts and all other types of equipments as operating leases. (Brigham & Ehrhardt 2009:734) This is because finance leases cause the company's liabilities to increase, thereby rendering its debt-related financial ratios like its debt-to-equity ratio unattractive to investors and other interested parties.

The same is true to the resulting gearing ratios and returns on assets that are all computed based on the company's total assets, liabilities and equity. (Mills 2008) Consequences of Recording Leases as Operating Leases There are misleading consequences that arise from recording the company's lease transactions as operating leases. Operating leases are recognised only as expense accounts. They are reflected only in the company's income statement for the period and are not at all included in its balance sheet.

Thus, the economic resources and the level of obligations of the company, as shown by its balance sheet, are all understated. Needless to say, the computed ratios would turn out to be inaccurate. (IASCF 2009) It is, then, clear that the balance sheets and income statements of a company that records its lease transactions as finance leases would be greatly different from the financial statements that would have been generated had the company booked the same lease transaction as operating leases.

(Mills 2008) This negatively affects the transparency of the company's