Accounting Theory and Contemporary Issues

Running head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Accounting theory and contemporary issues
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1ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Abstract
The report will conduct critical evaluation of AASB 117, its drawback and the requirement for
change. It will highlight the changes incorporated in new accounting standard AASB 16 and
impact of changes in lease standard on the entities those have significant level of the lease
financing. The report will find out the reasons behind the tendencies of the entities to classify
the lease contracts as operating. It is said that the implementation of IFRS 16 is expected to
improve the comparability among companies who lease the assets and who borrows to buy
asset and this statement will be analysed in the report. It will further state the Impact on
leasing market owing to application of AASB 16 and key disclosures provided by Rio Tinto for
transition to AAASB 16 from AASB 117.

2ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Table of Contents
Introduction.................................................................................................................................3
Critical evaluation of AASB 117 and its drawback......................................................................3
Requirement for change.............................................................................................................4
Changes incorporated in new accounting standard AASB 16....................................................4
Impact of changes in lease standard on the entities those have significant level of the lease
financing......................................................................................................................................5
Tendencies of the entities to classify the lease contracts as operating.....................................6
Implementation of IFRS 16 is expected to improve the comparability among companies who
lease the assets and who borrows to buy asset.........................................................................6
Impact on leasing market owing to application of AASB 16.......................................................7
Key disclosures provided by Rio Tinto for transition to AAASB 16 from AASB 117..................8
Conclusion..................................................................................................................................8
Reference....................................................................................................................................9

3ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Introduction
Before issuing the new standard IASB considers costs and the benefits associated with
the new requirements. This consideration includes assessment of impacts on the costs for
both the users and the preparers of the financial statement. Further, the comparative
advantages that will gain by the preparers in developing the information that would have
otherwise charge the users in estimating the same. New lease accounting that is AASB 16
will overwrite the existing lease standards AASB 117 and the new lease accounting is
expected to deliver the stakeholders and investors with more transparent view for the financial
position of the entity. To adopt the new standard effectively they will require developing the
forward strategic path. It will require the entities to transform radically regarding how they will
account for lease (Barone, Birt and Moya 2014)
Critical evaluation of AASB 117 and its drawback
The primary objective of AASB 117 was to prescribe the appropriate accounting
standards for lessors and lessees and the disclosures applicable to lease. As per AASB 117
the leases were to be classified on the basis of the extent to which the rewards and risks
associated with the ownership of leased asset will lie with the lessee and lessor. Lease
classified as the finance lease if considerably all the risks and rewards associated with the
ownership is transferred. On the other hand, the lease is considered as operating lease if
considerably all the risks and rewards associated with the ownership are not transferred
(Rapoport 2013). Whether the contract will be considered as the finance lease or operating
lease depends on substance of transaction and not on the form of the contract. However
owing to various drawbacks associated with the old lease accounting the accounting
standards board felt it necessary to change the old standards and introduce the new
accounting standard AASB 16. Various drawbacks are as follows –
 As per the old accounting standards the difference among capital leases and capital
assets are included under the balance sheet. The operating leases are recorded as an
expense under the income statement and the capital leases are not reported.
 The difference between finance lease and operating leases were not made. Hence,
using the same as an opportunity most of the entities used to omit the lease from their
balance sheet that in turn misstates the financial position of the company ( Aasb.gov.au
2019).
 As the future payment for the operating lease are not reported in the financial
statement of the entity it create major difference between the amount reported by the
entity under lease and the actual lease obligation.
 It used to recognize the depreciation associated with lease assets and the interest on
account of lease liabilities under the income statement over the term of lease
 It separates the amount cash paid into the principle amount that is involved with
financing activities and the interest that is generally presented within the financing or
operating activities under the cash flow statement (Aasb.gov.au 2019).
Hence, for removing such issues AASB decided to issue the new lease accounting
standard AASB 16 that will help in presenting the financial statements in more transparent
way which in turn will facilitate the users in making decisions.