Impacts on the financials of Compass Group - Essay Example

«Impacts on the financials of Compass Group» The International Accounting Standards Board and the US Financial Accounting Standards Board publish the changes in this document jointly. The proposals are derived from facts such as insufficient information provided today. Secondly, the fact that the enhanced disclosure is as well not enough and finally, there is the objective of realizing an improvement in the quality and the comparability of the financial reporting. During the analysis of the lessee’s financial position, it is evident that many users tend to want to capitalize operating leases through adjustments made to the reported financial information. The funny bit about such adjustments is that they can be based on the annual expenses of operating leases (Arms 2010). On the other hand, they can as well be based on the undiscounted available future operating lease payments. These are normally available on the notes to the financial statements. Such is the information that is normally available to many users of the statements and the entire statement. The information is considered insufficient hence a recommendation that the adjustments be made repeatedly and even severally while measuring the same amount. This results into uniformity and quality decisions being made, in the process the populace would be in the position of rationalizing their information (Bell 2000). Secondly, it is argued that enhancing disclosure is never enough given enough consideration and those boards of most companies think and take such disclosures in a manner that it does not appear a substitute. The ED proposes that corporations report assets and liabilities as the failure to report or make such disclosures. The proposals further demand that the leased assets and liabilities always be computed and measured on discounted basis. The proposals require under this ED that the lessee reports all the assets and liabilities of an aggregate of the leases that have existed for a period of not less than 12 months in the balance sheet. This has the impact of a faithful representation of the lessee’s financial position (Fields 2002). In addition to such disclosures, there is an enhancement of transparency concerning the leverage of the lessee. The ED proposals demands that leases be classified as either Type A or Type B leases depending on whether they are property such as land and building and land or the leases are other than property such as equipment, aircraft, cars or tracks. For Type A leases, the right of use of the asset and the lease liability is recognized and the unwinding of the discount will be recognized separately from the amortization of the right to use. Type B leases on the other hand are recognized as Type B with a difference being on the recognition of the unwinding of the discount which is recognized as a single lease cost (Walton 2009). Under the proposals for Type A leases, the lessor will stop recognizing the asset and therefore recognize a right to receive lease payments and the residue of the assets. The lessor will also recognize the unwinding of the discount on both the residue of the assets and the lease receivable. Any profit relating to the lease will be to the advantage of the lessor. For type B leases the lessor will continue recognizing the underlying asset and recognize the lease income over the lease term (Exposure draft of implementation guidance to accompany draft FRS 103 insurance contracts: guidance for entities issuing insurance contracts on applying: draft FRS 103; the requirements or principles of FRS 102 to insurance contracts; and schedule 3 to, 2013). I measuring the value of the assets and the liabilities arising from a lease, variable lease payments would be abandoned and an inclusion would be made of optional periods if the values are of significant economic incentives and an option of being furthered (Fields 2002). For those other than he leases with this option, an accounting policy election is made by both the lessor and the lessee. A company is also obliged to make disclosures to enable the ease in use by users of financial statements in terms of ease of knowing the amounts, the period and how uncertain it is for cash flows arising from such leases (Hines 1999). Impacts of the proposals on the financials of Compass Group Compass group is a food services and support services company that operates in over 50 countries in the world. The proposed changes by the Exposure Draft ED/2013/6 Leases have many impacts on its financial statements given the importance of leases in terms of their recognition, measurement and their ultimate impacts on revenues. Compass group as a lessee of Type B property experiences a fluctuation in the amounts it pays to its lessors as lease payments to the leased property. Such expenses are never recognized accurately at the time they are incurred according to the proposals which results in a situation where the balances on the income statements fluctuating. Profitability prediction is a thing of the past for Compass group and hence comparison with industry players as well becomes difficult. The food and service industry is quite a competitive field hence requires reliable data to aid the institution of competitive strategies (Compass Group plc and Rail Gourmet Holding AG, Restorama AG and Gourmet Nova AG: a report on the merger 2002). Compass Group is also faced by non-quantitative challenges as they have to consider both contractual and non-contractual factors before establishing the termination of a lease. Compass group as a lessor on the other hand faces uncertainty when it comes to the recognition of Type A leases due to the complex nature of their recognition and valuation. As a lessor therefore, there is a conflict of policy since there is the use of the de-recognition approach in valuation of the residual value as compared to the accrual approach. Such inefficiencies has made it possible for poor financial statements both in the balance sheets and the income statements (Fogiel 2004). Therefore, the proposals have not in a way helped improve efficiencies in the identification and measurement of leases. The proposals are in themselves complex making it quite hard for accountants and users of financial statements to adapt with them. Investors and creditors require easily understandable information and creditors as well require policies that would ensure that they receive their debts promptly. Transparency would therefore be hindered by such proposals and hence the need to realign them before they are enacted for adoption by players in business and finance industries (The Journal of corporate accounting & finance, 1999). References Arms, A, 2010, Hot issues in securities laws, 2010: disclosure documents and trends, Practicing Law Institute: New York, NY. Bell, A, 2000, Introductory accounting & finance. Nelson: South Melbourne. Compass Group plc and Rail Gourmet Holding AG, Restorama AG and Gourmet Nova AG: a report on the merger, 2002, Stationery Office: London. Exposure draft of implementation guidance to accompany draft FRS 103 insurance contracts: guidance for entities issuing insurance contracts on applying: draft FRS 103; the requirements or principles of FRS 102 to insurance contracts; and schedule 3 to, 2013, Financial Reporting Council: London. Fields, E, 2002, The essentials of finance and accounting for nonfinancial managers. AMACOM: New York. Fogiel, M, 2004, The Business, accounting, & finance problem solver: a complete solution guide to any textbook, The Association: Piscataway, NJ. Hines, T, 1999, Accounting & finance, Checkmate Gold: Kingstone. Needles, BE, & Powers, M, 2013, International financial reporting standards: an introduction (3rd ed.), South-Western, Cengage Learning: Mason, OH. The Journal of corporate accounting & finance, 1999, Executive Enterprises: New York, N.Y. Walton, P, 2009, An executive's guide for moving from U.S. GAAP to IFRS, Business Expert Press: New York, N.Y.] (222 East 46th Street, New York, NY 10017). Read More