IAS 17 Proposed Changes in the 2013 Exposure Draft - Essay Example

 IAS 17 Proposed Changes in the 2013 Exposure Draft IAS 17 is concerned with leases in the accounting concept considering the importance of lease in a variety of business entities (Finch, 2012, pg. 54). Leasing implies gaining access to assets, obtaining finance while at the same time ensuring reduction of business exposure to the underlying risk associated with ownership of assets. The underlying concept behind leasing implies that it proves essential that those in need of financial statements are provided with concreteas well as an understandable concept of leasing deals an entity undertakes. The past accounting practices for leases called for those leased as well as the lessor to group leases in the form of financial or operating leases while also recording such leases separately (Elliott and Elliott, 2013, pg 216). The lessees are advised against recognizing assets as well as liabilities that result from operating leases. That concept has over time attracted the attracted significant request from users of financial statements as well as others to enhance changes that will ensure that lessees are upheld to recognize liabilities as well as assets in the financial statements. The IASB as well as FASB engaged in a joint project that focused on developing the relevant measures to ensure that lease assets will be recognized in the statement of financial position. The two bodies deliberated on revisiting the 2009 Exposure Draft that was issued in 2009 to seek preliminary views and FASB accounting Standards update issued in August 2010 to enhance forming an Exposure Draft in 2013 (Ellis, 2014). The proposed Exposure Draft of 2013 will only affect entities that engage or are engaged in lease irrespective of some specified scope exemptions. The Exposure Draft 2013 would supersede IAS 17 leases in IFRS. The primary principle of the proposed requirements is that a company will ensure recognition of assets as well as liabilities that result from lease agreements. The proposed requirements serves as a way of improving the existing lease requirement that fail to require lease assets together with liabilities to be recognized by majority of lessees. The principle will therefore require lessees to ensure recognition of assets as well as liabilities for leases that possess a maximum possible term of more than one financial year (EFRAG, 2013. A lessee will have to recognize the lease liability as well as the underlying asset for lease term. In recognition, measurement as well as presentation of an entity’s expenses and cash flows resulting from a lease on the side of a lessee is dependable on whether there exists any expectations from the lessee side to spend more than realizablepart of the economic value attached to such an underlying asset (ACCA, 2014). The assessment therefore relies on the type of the underlying asset and is measurable in practical measures. Such classification of assets as opposed to property but including equipments and other assets for transportation, the lessee will group such a lease as Type A in the following perspective. First, ensure recognition of the asset as well as the liability of the lease through ensuring measurement in form of current value cost of lease. Secondly, ensure recognition discount amounts resulting from the lease in terms of a debt as a form of interest through separate approach from amortization of the right-of-use asset (External Reporting Board, 2014). For a majority of leases property that are mostly common in lease agreements that include land, buildings or part of buildings, the lessee will ensure recording of such type of lease as Type B. The first step will then recognizing powers of asset use as well as the lease debt that is initially accorded its current value. Then secondly, record one lease cost that comprises of unending discount relating to the lease debton the lease liability together with the value amortizedas a resulting from the powers of using the asset through a straight-line method. Consequently, the accounting treatments on the lessor’s books is equally dependable on anexpectation of whether the lease will consume beyond an insignificant part of the economic benefits attached to the asset in question (IASB, 2013). The accounting treatments on the books of the lessor will reflect three recordings as follows. First, derecognize the asset under lease and ensures recognition of a right to receive payments emanating from lease as well as a residual asset. Then secondly, ensure recognition of the unwinding of the discount provided on the lease receivable as well as the residual asset recording it as interest income that runs over the lease term and lastly ensure recognition of profits attributed to the lease at the end of the lease. For a majority of leases of property, the lessor’s books will reflect classification of the lease as Type B that will require application of accounting practices that are mostly similar to the ones that an operating lease accounting entails (ACCA, 2014). For both the lessee and the lessor, measuring of assets as well as liabilities resulting from a lease will require exclusion of a significant number of variable lease payments. Consequently, the one looking for a lease and the one providing are obligated to record payments resulting from optional periods only if the lessee possesses a major economic incentive that calls for right to exercise a possibility of lease extension or not to exercise an option essential in terminating a lease. The proposals are yet to be effected since the Exposure Draft was presented in September 2013 but it proves essential to examine whether such improvements will impact the substance over formowing to the fact that changes on disclosure of assets and liabilities will result. In accounting, substance relates to an accounting principle that plays a significant role in ensuring that financial statements present complete, relevant as well as accurate information relating to an entity’s transactions as well as events. Where a company full adheres to the accounting principle of substance over form, such a company’s financial statements signifies the financial truth of the company as opposed to the legal form of such transactions. That signifies that substance over form is essential in ensuring that organizations will measu9re, report as well as present the economic impact of an effect rather than its legal form on the entity (Nandakumar, 2010, pg. 154). Principle is essential for any entity that aims at presenting reliable financial statements and ensuring reliable reporting. The principle is essential and equally relevant on issue related to revenue recognition together with sale and purchase agreements among others. For example, i0f a company approaches a financial institution with an aim of seeking cash and sells its machinery and later obtains it back, initially, although the legal ownership had transferred, the substance over form principle treated the two processes as a single transaction (Melville, 2014, pg 312). The proposed changes in IAS 17 will affect substance over form as leases will cause economic impact on entity’s and such a transaction will require double recording as opposed to a single transaction. References ACCA, 2014, November 17. Accounting for leases | F7 Financial Reporting | ACCA Qualification | Students | ACCA Global. Retrieved from http://www.accaglobal.com/uk/en/student/acca-qual-student-journey/qual-resource/acca-qualification/f7/technical-articles/accounting-for-leases.html. ACCA, 2014. Paper F7 Financial Reporting: Complete Text”, Kaplan Publishing. EFRAG, 2013, May 6. Exposure Draft ED/2013/6. Retrieved from http://www.ifrs.org/current-projects/iasb-projects/leases/exposure-draft-may-2013/documents/ed-leases-standard-may-2013.pdf Elliott, B. & Elliott, J, 2013. “Financial accounting & reporting” 16th Edition, FT Prentice Hall, Ellis, M, 2014, May 11. Retrieved from accountancystudents.co.uk/ias_17_leases/ External Reporting Board. (2014, June 27). IASB ED 2013-6. Retrieved from http://www.xrb.govt.nz/Site/Accounting_Standards/Exposure_Drafts/IASB_ED_2013-6.aspx Finch, C, 2012. “A student’s guide to international financial reporting standards” 3rd Edition, Kaplan Publishing. IASB, 2013, May 16. IASB publishes highly anticipated lease accounting proposals. Retrieved from http://www.iasplus.com/en/news/2013/05/leasing-proposals. Melville, A, 2014 “International financial reporting: a practical guide”, 4th Edition, FT Prentice Hall. Nandakumar, A. K, 2010. Understanding IFRS fundamentals: International financial reporting standards. Hoboken, NJ: Wiley. Read More