Accounting Theory and Contemporary Issues, Leases in Accounting - Assignment Example

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Leases in Accounting

Introduction

The AASB 117 is the equivalent of IAS 17.The IAS 17 was issued the name from the International Accounting Standards Board. Its primary objectives are to aid in the categorizing of leases either as operating or finance leases.

Question 1

Operating lease refers to the situation whereby the lessee can return equipment to the lessor without any obligation attached at the end of the lease period. This action implies that the lessor gets the ultimate privilege of owning the equipment after its sufficient useful time. In the operating lease agreement, the lessee has no choice on the residual amount that is required. The financial leases are used in the buying of equipment for the major part of the useful life. In the lease period terms, the lessee is expected to gain the ultimate ownership of the equipment after a successful offer to buy the equipment is put into place and the relevant procedures put in place. This process implies that the residual or balloon choice amount for the purchase of the goods goes towards the lessee in the financial lease agreement.

The remaining amount that is evolved in the finance lease is usually set up by the use of the ATO asset guidelines. In the operating lease agreement, the running or the administration cost are all the costs that are incurred and are included in the rental by the use of the duly designated terms and the usage is set under the one-month repayment schedule. Contrary to the finance lease agreement, the running cost of the business is not included hence it results into price fluctuation and administration cost increase for the lessee. Operating lease agreement treats the account as an expense. The finance lease statements are included as assets about the lessee. In the finance lease agreement, there is an avoided additional resale risk that goes as a disadvantage in the lessee (Christian and Lüdenbach, 2013, p.39).

Question 2

The main difference between the IAS 17 and the new IFRS 16 which stands for International Financial Reporting Standard, on the view of the lessee, is the fact that the IFRS 16 lessee has the advantage of the right to use the asset as well as the lease liability. In the IFRS 16, the lessee is stipulated to recognize an asset value for the right. The use of the leased item results in a subsequent liability for the present value to the future view of the payment of the contract. In the IFRS 16, the lessee's current dual accounting model is successfully removed.

This statement distinguishes the on-balance sheet finance leases and the incumbent off-balance sheet that operates the lease. The single on-balance sheet accounting model is similar to the current finance leases in the accounting process. On the broad perspective, the lessees on the lease result into it becoming the on-balance sheet liability. It attracts some interest and an asset on the other side of the balance sheet. The lessees are deemed to be richer on the asset but also more heavily indebted. By this concept, it means that there is going to be tremendous changes in the entire life of the lease. Companies will henceforth experience front loaded pattern on the expense for a higher level of a contract.

The process will be subjected to constant annual rentals. All the first player companies will require an assessment of the extent of the standard impacting them to address the wider business implications. It can result to close interest by the analysis revolving around the outcome of the rules on the financial performance. The cost is required for the implementation and any difference that may be suggested in the business practices.

In the IAS 17, the lessee has the non-cancelled period for the contraction of the lease for the assets together. The lessee has the authority towards to continuation of the duration of the contract with or without the disbursement of further payments. The inception of the lease will ensure that the lessee does reasonably exercises. For this to happen, various conditions need to be made such as including a non-cancelled lease that is only canceled under certain opinions. Some of these circumstances include cancellation with the permission from the lessor, occurrence of the remote contingency. For instance, the lessee enters into a current lease to serve the same or equivalent asset with the same lessor. The payment by the lessee results to an extra amount of funds at the beginning of the contract, and the movement of the continuance lease that is certain (Christian and Lüdenbach, 2013, p86).

Question 3

The meaning of off- balance sheet liabilities is used in the article as an item that is not reported on a statement. The expenses are supposed to be repaid at a future date. Some of this item can include the proceedings following the litigation. The balance sheet analysis only gives the suggestion that a firm has low levels of debts. It also has limited numbers of debt with few liabilities which all depends on how the finance is classified. The formation of adequate parameters keeps the reported capital levels low and financing that does not have to be reported on the balance sheet.

The result is usually an incomplete corporate picture. A massive collapse of big firms in previous years has been experienced due to the companies hiding the off-balance sheet liabilities. For banks, the main agenda is not only to know the assets and the risk of the unrealized ability of a corporate client. It is to comprehend what is on or off the balance sheet concerning their liabilities towards capital adequacy assessment purposes. Off- balance sheet financing is a type of funding that tries to avoid placing the equity of the owner as a liabilities or assets on the balance sheet of the firm. The crucial OBS technique can be used for a range of reasons which include managing the exposure to specific risks and decreasing the borrowing costs.

The off- balance sheet funding is a great way of reducing the cost of borrowing if the lenders are not informed about the unrecorded liabilities to avoid breaking some of the debt covenants. The restrictions that are found in the debt treaty are meant to protect the welfare of the lender. The restrictions can be stated regarding financial ratios which dictate whether or not the liability will be reordered actually. All these methods have adverse outcome relating to the financial ratios. The total debt is the denominator expressing them as lowers as if the financing had been thoroughly acknowledged. Various factors act as a driving force for the off- balance sheet. Some of these factors include joint ventures, operational leases, derivatives, partnerships, sales of the receivables, securities and the special purpose entities (Christian and Lüdenbach, 2013, p.34-36).

Question 4

Section 4a)

The change in the lease accounting may not be popular to everyone because it will have its share of its disadvantages. One of the significant implications will be on the financial impact whereby it will result in the increase in the assets to the tune of US$2.8 trillion that will be added to the property of the listed entities globally. The new standard will additionally require the entire lessee to acknowledge all leases on the balance sheet (Christian and Lüdenbach, 2013, p96).

It will have a significant influence in the assets and the liabilities on the balance sheet replacing the rent and lease expenses with depreciation and the additional interest costs (Christian and Lüdenbach, 2013, p.50-52).

With the introduction of the IFRS 16, the companies will have a critical choice on either restating their comparative or forming an accruing adjustment that will open into the retained earnings. It will successfully adapt to the measure that views the relevant impacts. A lease will then be registered as a non-current asset which will be considered as a belittlement by the IAS 16.The best side of this process is that it will improve the transparency and comparability in the financial holding necessitating greater insight into a firm's funding and the day to day operations.

The major consequences will include the change in the balance sheet ratios, interest cover and providing an agreement that can be renegotiated. It will ideally result to the removals of the off-balance sheet in the core financing choices including sale and leaseback practices. The bottom line will subsequently have to change. The value-in-use calculations are essential in the situation that Cash-generating Unit's increase in the terms of the significant assets. The basic patterns that will result to no more lease straight lining as the route to expenses recognition will have to change subsequently (Christian and Lüdenbach, 2013,p.40-45).

Section 4b)

The change that will result following the account lease adjustment on the default on debt covenant will be based on the likelihood of the finance providing clauses in its jurisdiction that allow the bank to lends money immediately to the payment of the money they had previously given an individual. These may be after unique situation occurrences happening that would result to the arising of the liquidity risk of the firm. These ideas may lead to the guidelines of the lenders right to demand back for the payment of the money owed. The relationship with the debtor will end if the latter is declared insolvent with the subject of bankruptcy procedures occurring. Some the parameters that may indicate this state includes the receivership tact, liquidation, and the creditors agreement (Christian and Lüdenbach, 2013, p.17-18).

Question 5

Section 5a)

In the alternative view, the loan contracts will mean obligation of the debtor and several other things to accomplish specific commitments. They ensure that the banks issuance of the loans is treated with the similar way it would the creditors in the non-guaranteed loans placing the weaknesses on a provision of a real guarantee to new leadership. The companies that lease property will be required to have a recognizing on the balance sheet asset and liability for the ease in the period of one financial year.

The reporting of the lease, expenses, and cash flow will depend on the classification of the lease either as an operational or financial contract. The updated standard requires that both kinds of leases are recognized on the balance sheet. These changes have to be observed by the companies before the year December 15 2018.These changes will imply an increase in the assets as well as the liabilities. This process will happen without affecting the equity. This process may give the investor a false impression that the company capital is at risk. He or she is required to view the idea and not focus on the money alone. The Chief Finance Officers will be needed to inform the investors beforehand about the leasing agreement being deployed. These will instill the first fundamental maintenance of the business idea at hand. A transparent way should be in place to ensure no loophole is experienced in the balancing of the balance sheet.

Section 5b)

The new standard IFRS 16 would be the best form of lease standard to consider. It is due to the contract as it will result in more expression of the most genuine representation of an organization assets and liabilities. Transparency will be the best component to applaud as issues of the contrary will be a thing of the past. The financial leverage and the capital will be employed to all the market players.

The comparability between the company and the lease assets of the firms wishing to buy the property will be expressed respectively. It is contrary to the IAS 17 that point it disadvantage in transferring all the risks and rewards to the lessee. Some of this includes the lessee bargain on the option of the purchase to go with the present value of the minimum lease payment being equal to all the fair value of the currently leased asset. The cancellation costs are always borne to the lessee on the event of the action before the end of its terms.

Conclusion

The International Financial Reporting Standard 16 will be the best bargain as it will offer guidance on the best accounting principles about the lease standards. With its inception, transparency will be a characteristic that will ensure proper ways towards a better life.

Reference

Christian, D. and Lüdenbach, N. (2013). IFRS Essentials. Hoboken, N.J.: Wiley.