Discuss problems arising from IAS 17 - Essay Example

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When obligations and assets of the item leased under the finance lease is such that an occurrence may be omitted in the financial statements of the lessee thus leading to understatement…
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Discuss problems arising from IAS 17
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Download file to see previous pages Firstly, restructuring of the asset at the inception of lease treaty creates more amounts recorded in the fixed assets and decreases the asset earnings. If the current value of total future lease obligations upsurges, it affects debt equity ratios and liquidity solvency ratios. Secondly, identification of entire forthcoming lease payments as obligations may cause breaching of debt agreements causing debts to become due immediately. Similarly, reporting profits may decrease when depreciation and interest expense is more than rental expenses. This makes it difficult for the IAS 17 to be fully implemented in international accounting.
What’s more, it is impossible to deduct interest expense for tax purposes. The principle is inapposite in service contracts like copyrights and patents. It is normally applicable to tangible assets. ISA 17 is irrelevant and inapplicable to the service part of the contract as the guideline does not transfer the right to use the property.
Additionally, classification of a sublease into an operating lease may lead to income incongruity. Categorization of a sublease into operating lease will lead to a leaser recognizing amortization of interest expenses and their right to use the property leased (Monson, 2001). Hence, the leaser may recognize rent proceeds in a manner that is considered as evenly spread during the entire lease period (Young, 2011). The transitional leaser will, thus, incur a forfeiture due to the earlier murky arrangements previously made. Also, this mushroom from interest and depreciation that increases proceeds of operating lease in earlier periods causing a swap in later years from interest rates decreases. A situation arises under current standards where the head lease is a finance lease and sublease is operating lease, but the IAS 17 proposals will lead to arrangements to classify head lease currently as an operating lease. The staff may also not propose to adjust and amend ...Download file to see next pagesRead More
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