Accounting for Lease: A Critical Review

This report critically evaluates the old accounting standard for lease (AASB 117) along with highlighting its drawbacks. It includes the changes that have been incorporated in the new standard of accounting for leasing of assets along with affecting the change for this particular accounting standard. The report also discusses the implementation of IFRS 16 that improves comparability for buying of assets along with lease assets. An ASX listed company has been included that includes transitional effect for its overall provision.

ACCOUNTING FOR LEASE: A CRITICAL REVIEW
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Abstract
This current report has focused on the accounting standard for lease that is AASB 117
along with highlighting its drawbacks. It includes the changes that have been incorporated
in the new standard of accounting for leasing of assets along with affecting the change for
this particular accounting standard. AASB 117 has both operating lease as well as
financial lease that provide positive accounting theory that relates with behaviours of
managers. It also includes the implementation of IFRS 16 that improves comparability for
buying of assets along with lease assets. An ASX listed company has been included that
includes transitional effect for its overall provision.
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Table of Contents
Introduction............................................................................................................................3
Critically evaluating the old accounting standard for lease (AASB 117) along with
highlighting the drawbacks.....................................................................................................3
Necessity for the change.......................................................................................................4
Changes that have been incorporated in the new accounting standard of lease AASB 16..5
Significant level of lease financing that change in the accounting standard for lease..........6
Tendency to classify most of the lease as operating lease...................................................7
Implementation of IFRS 16 that improves comparability between companies for leased
assets and companies that borrow to buy of assets..............................................................8
AASB 16 affecting lease marketing that decides buying more assets along with reporting
entities that buy more assets that lease assets.....................................................................9
Summarising the key disclosure of the company that made on accounting on lease along
with transitional provision and effect......................................................................................9
Conclusion...........................................................................................................................10
Reference list.......................................................................................................................11
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Introduction
Accounting for lease is essential for an organisation as it mainly deals with the leasing of
assets in which the assets are generally not bought or the business purpose. Lease
accounting highlights the classification of assets that are available within the business
organisation along with implementing the roles and responsibilities that are required to be
performed during their accounting treatment and maintaining the financial viability of the
firm. AMP limited has been considered in the study that has disclosed their financial
statement which points out the transitional provision and effect of accounting on lease.
Critically evaluating the old accounting standard for lease (AASB 117) along with
highlighting the drawbacks
The old accounting standard for lease generally describes the accounting policies along
with disclosures that are applicable for leasing. As per James (2016), lease financing is
required to be classified the property that held with accounting along with investment
property with fair value model. Leases that are needed to be enhanced as finance leases
that moves well all the risks along with rewards of possession, and provides rise to plus
and recognising the liability by the tenant and due to the lease giver and operational
leases that lead to recognising the overall expense by the lessee, along with pointing out
the assets that provides support to the firm.
The target of AASB 117 is for inflicting the available assets. The policy of accounting that
is suitable in nature mainly discloses the availability of the finances along with pointing out
the sources of leases that is operating in nature. According to Joubert et al. (2017), lease
that is operational in nature mainly depends on the action that is totally dependent on the
overall action that is required to be performed by the group of accountants. Moreover, it
also plays a very essential role for maintaining its shape that generally points out the
sources of income for the leased assets. The classification of the group of action includes
the pointers liability which includes the overall determinants which consist of some assets
such as land and building which includes the cost of leasing of assets (Beckman, 2016).
Highlighting the drawbacks
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The old accounting standard for lease mainly applies to the lease agreement of the
mineral oil, gases, petroleum and other. However, this particular accounting standard is
not at all applicable to the property that held with the investment property along with
setting fair value model. Based on the viewpoint of Buchman et al. (2016), operating lease
that are provided by the lessor includes the adjustments that are required to be performed
in the highlights of the initial development of the business. The assets that are biological in
nature mainly provided by the losses that mainly operates under the operating lease;
AASB 117 has both positive as well as negative aspects in the accounting standard in the
investment property along with recognising the overall property of the organisation
(Kusano et al. 2016).
Necessity for the change
Accounting for lease includes transferring of the lease that act as vital part in the
assessment life of the assets that even not leads to the economic adjustment of the
available assets. Kusano (2019) have stated that accounting of lease in earlier year mainly
points out the available assets that is required to be initiated with other assets in the firm.
Moreover, it also transfers the sustainability that is associated with all types of risks that
are faced in the incident of the ownership. The option of purchasing the asset includes the
opinion that are effectively lower than the original value which has been identified in the
reasonable condition that are directly associated with the leased assets. Alexander et al.
(2018) have mentioned that leasing of assets highlights the quantity that is required to be
initiated by the overall components of the assets that might be treated as one single unit
along with classifying the available leases that are operational in nature.
Required changes
The interest of the leased assets such as land and building is not required to be included
in the interest of the lease holder that are mainly classified with the investment property
along with other standards of accounting. Foust et al. (2015) have opined that the term
that is leased in nature is mainly required to be recorded in the quality as well as quantity
for lowering the overall quality of assets. The minimum amount of lease payment along
with maintaining the financial viability of the gift that is associated with liability of the
payments. Lease payment that ought to be initiated by the charging in the assets over the
time period that has been identified in the financial statement of the firm. As mentioned by
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Hussan and Sulaiman (2016), the standard of accounting includes the reduction of the
liability that are outstanding in nature is required to be initiated for continuing in the
allotment. The controlling of financial lease includes the overall policy of the depreciation
that is required to be initiated within the assets that are available in certainty. It is also
required to be initiated by the possession by the lease that is required to be applicable with
the total process that is required for financial viability.
Changes that have been incorporated in the new accounting standard of lease
AASB 16
The new standard of accounting has an effective issuing for the process of annual
reporting that is required to be initiated before any kind of interpretation in the overall
process. AASB 16 mainly deals with the source of financing that is required to be initiated
with other assets that might be intangible in nature. In the month of February 2016, AASB
16 has been issued due to which it is been incorporated in the business by 1 January 2019
along with other changes in the financial statement. The following changes have been
made in the AASB 16.
Introduction and reporting of financial statement
A new model has been incorporated in the model of lease accounting that point out the
AASB 16 with rights to using of assets that mainly replaces the model of straight line
model of depreciation. As per Chambers and Dooley (2015), this particular method has
been related in the operating lease which is required to be mentioned in the statement of
financial position along with simultaneous position in the lease value of the parts of the
liability. The expenses of leases that relates with the operation includes the depreciation
that is required to be reduced with the expenses that is directly associated with the
operating lease that is required to be reported in the income statement of the firm. The
right to issue share includes the interest expenses that points out the financial position of
the firm along with indicating the posture of the finances in the firm (Ong, 2018). The
differences between the expenses include the financial position of the firm which points out
the main difference between the identification of assets and valuation of assets.
Other changes that includes types and leases
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Distinguishing forms of lease includes AASB 16 that distinguishes the full quantity of lease
as a contract or non-lease and lease contract. Schneider (2018) has observed that the
most distinction between them happens on the premise of identification of assets. Ripping
lease or rental payments consists of the lease or rental payments are distinguished into
non-lease component and lease element. During this case, no classification into finance
and operating lease are needed. Moreover, the correct to use a selected hired plus have
to be known before treating the identical. On the premise of this distinction expenses
associated with leasing are recognised within the financial statements. According to Chen
and Zhang (2018), fulfilment of definition as per AASB 16 includes the order to recognise
the quantity of lease within the financial statement the group action must qualify the
definition of the lease as per AASB 16. After that, the liability associated with leasing is
calculated on the premise of present values over the term of paying the lease. Within the
case of the contract, hired assets cannot be known whereas in lease contract leased
assets are often identified.
The treatment of leases expenses are generally the amount that is reported with higher
use of assets in the higher section of asset in the statement of financial position (Cheng,
2015). At end of every year, these transactions are pointed by the statement that includes
finances along with other operating leases of the sources along with commencing the
contract types in the variables condition.
Significant level of lease financing that change in the accounting standard for lease
An organisation that performs huge number of transaction is directly related to the leases
which also affects in the fiscal year. Changes in the process of treatment have been
reduced by the amount of lease that has been appointed with the effects that identifies
certain amount of debts in the financial statement. The following are the impact that
changes with accounting standard for lease payment.
Increase in liability and in carrying amount
This is often not sensible for corporations to mirror an augmented quantity of debt in their
money statements. Increased liabilities within the record associates with the
implementation of AASB 16 it is been found that the businesses report a high quantity of
liabilities in the Balance Sheet. Inspired from Sliwoski (2017), the AASB 16 has created it
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vital to record right-of-use plus as a non-current asset, also as lease liability is reportable
as an element of current or non-current liabilities on the premise of your time span. During
this means, the quantity of assets and liabilities changes moving the calculation of
monetary ratios. Changes within the carrying quantity accommodates lease amount that
has been found that the carrying amount associated with hired assets exceeds that of the
leased liabilities. This can cut back the quantity of equities reportable by the organisation
associated with the off-balance sheet users.
Alteration in financial ratio and EBITDA along with reduction in cash flow
Increase within the operative profit and EBITDA has the implementation of AASB 16 a rise
in the operating profit and EBITDA. The most reason behind this is often that corporations
record lease expenses as finance prices that are subtracted when the calculation of
operative profit and EBITDA. According to Holt and Eccles (2019), changes within the
money ratios includes additional correct financial ratios are often calculated with the
implementation of AASB 16 thanks to the entire news of assets also as liabilities in the
statement. Reduction in operative money flows includes the quantity of lease transactions
are recorded within the record and therefore the distinction between operating along with
finance lease are eliminated, the operative money flows are reduced.
Tendency to classify most of the lease as operating lease
Theory of accounting that is positive in nature mainly consists of three different types of
hypothesis that generally assist in tendency of classifying the lease in scenario of
operating lease. The following are the hypothesis that has been mentioned which
enhances the overall theory of accounting.
Bonus plan hypothesis
The appointed managers of the organisation have observed the bonus plan that assist in
recording of transaction along with earnings for the upcoming years. The outstanding
income that is reflected in the statement of finances that mainly highlights the good
financial position of the company along with enhancing the overall sources of earnings of
the firm.
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Debt covenant hypothesis
The appointed manager who mainly violates the terms and condition of the firm along with
violation of accounting standard has provided several benefits to the firm. As stated by
Park and Na (2017), it mainly supports in identifying of assets and options for future
transfers along with covering the amount of debts that has already been identified in the
statement of finances. It also violates the standards of accounting along with the
guidelines.
Political cost hypothesis
Providing benefits to the organisation by the appointed managers are generally ready to
pay the cost of politics that are huge in nature. These costs generally assist the firms that
are benefited with certain leases such as operating lease. The practice of reporting the
lease in a better way for justifying the benefits of the bonus plan is required to be
processed by paying the political cost.
Implementation of IFRS 16 that improves comparability between companies for
leased assets and companies that borrow to buy of assets
IFRS 16 is required to be implemented that assist in comparability between the companies
for the lease assets along with buying of assets. As per Dogan (2016), it is required to be
borrowed in buying of shares that can only be improved with implementing certain
standards of accounting which improves in disclosing of financial information. At the time
of lease transaction, both lessee and lessor is required to have a complete set of
information that are financial in nature for comparing between different organisation for the
assets that are leased in nature and borrowing of assets. IFRS 16 also points out the
leasing of assets along with recognition of assets that are financially available to the firm.
An instance might be taken of a company which possess total assets reported as per
AASB 117 is $ 300,000.00 & debts of $ 200,000.00 excluding the amount of lease, then
the asset to debt ratio is: = $ 300,000.00 / $ 200,000.00 = 1.50. On the contrary, if the
same company reports lease as per AASB 16 where total assets is $ 350,000.00 and
debts of $ 250,000.00 including lease, then the asset to debt ratio is: = $ 350,000.00 / $
250,000.00 = 1.40. It shows that the financial ratio might be easily comparable for buying
of assets.
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AASB 16 affecting lease marketing that decides buying more assets along with
reporting entities that buy more assets that lease assets
The explanation is to scale back the number of chartered asset from the money
statements of associate degree organisation. According to Pardo and Giner (2018), the
leasing market may receive a forceful impact of AASB 16 if corporations choose buying
assets instead of leasing them. The provisions of full disclosure of lease transactions
under AASB 16, the financial statements mirror a better quantity of lease transactions as
compared therewith of AASB 117. This can be the foremost vital reason due to that
corporations choose buying assets instead of leasing them when the implementation of
AASB 16. Moreover, the new principle does not offer the good thing about classifying
lease expenses as associate degree operational lease within the money statements. As an
example, a corporation possess total assets reported as per AASB 117 is $ 300,000.00
and other debts of $ 200,000.00 excluding the amount of lease. On the contrary, if the
identical company reports lease as per AASB 16 wherever total assets are $ 350,000.00
and debts of $ 250,000.00 together with lease quantity. Therefore, off-balance sheet
leases are unable to lease assets which might be unbroken hidden. Reflective higher risks
within the money statements are not sensible for a corporation leading towards a discount
in financial support from the investors. These leads to reflective a high quantity of risks
within the money statements associated with the lease.
Summarising the key disclosure of the company that made on accounting on lease
along with transitional provision and effect
AMP Ltd is a company within the financial industry of Australia that provides merchandise
services associated with investment, insurance, banking merchandise and others. The
corporate is listed within the Australian Securities Exchange or ASX's 50 index. The
corporate recognises a serious portion of its lease as an operative lease underneath the
depreciation within the earnings report. Moreover, the corporate tends to report a lease
from a future amount within the current year’s financial statements. This treatment of
leases must be modified from the following year with the incorporation of AASB 16.
Treatment of monetary statement and changes in leases amount
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The correct use of assets within the record excludes worth of low value chartered assets
and short-run leases. There are many Accounting Standards that have issued however are
not effective within the current year; one amongst such Accounting Standards is AASB 16.
The most reason behind this increase involves the complete revelation of lease
underneath AASB 16, in contrast to the previous standards. The corporate AMP Ltd has
calculable that with the implementation of AASB 16 from 2019 the worth of lease can
increase from $ 200 million to $ 220 million as a liability with the corresponding quantity of
lease assets.
Adaptation of principle
The implementation of AASB 16 changes within the nature of lease expenses may be
seen. AMP Ltd has determined to implement AASB 16 since 2019 with the assistance of
the retrospective method. The most reason behind this call is to report the right quantity of
lease amount within the finances of an organisation. As an instance, expenses associated
with an operative lease were recorded underneath the depreciation. On the contrary,
AASB 16 considers the operative lease expenses as depreciation on Right of Use assets
also as interest expenses on the lease liability. Moreover, the corporate would not offer
any comparative data statement associated with the number of lease. Within the
retrospective method accumulative result of implementation is adopted wherever all the
adjusted price of lease is treated as preserved earnings of the corporate.
Conclusion
The standard of account that deals with lease accounting along with consisting better
adaptation of principles It has been found that the AASB 117 classifies total lease into two
parts like finance lease and in operation lease in contrast to AASB 16. In many cases
problems are found just in case of monetary news of firms since the record reflects
incomplete information associated with leasing. It may be aforementioned that AASB 16 is
that the tool of reducing the quantity of off-balance sheet users. Transactions connected
with leasing are increasing day by day due to the necessity of assets in an organisation.
AASB 117 generally includes the direct cost that is new in nature along with defining the
overall rate of interest that implicit in the lease.
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