Accounting Theory and Current Issues

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This document discusses the critical evolution of the old accounting standard for lease (AASB 117) and highlights its drawbacks. It also explores the changes incorporated in the new accounting standard for lease AASB 16 and how companies with significant lease financing will be affected by the change in accounting standards. The document also explains why companies tend to classify most lease contracts as operating leases and how positive accounting theory relates to this behavior of managers.

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Accounting theory and current issues

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Abstract
The international Accounting standard Board issued in January 2016 AASB 16 well known
"lease Contracts" that will replace IAS 17, the present day standard on "lease Contracts". The
application of AASB 16 is mandatory starting with January 2019. The exception of the rule is
made for low-cost items or the one's items that are leased for a duration same to or much less
than one year. The right to use and lease legal responsibility will be recorded in the Balance
sheet of the lessee making use of AASB, regardless of the category of the higher economic or
operational.
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Contents
Accounting theory and current issues..............................................................................................1
Abstract............................................................................................................................................2
Introduction......................................................................................................................................4
Main Body.......................................................................................................................................4
Critical evolution of the old accounting standard for lease (AASB 117) specifically
highlighting the drawbacks..........................................................................................................4
The AASB sixteen reviews the lease prices in a way that they have a tendency to be front
loaded i.e. greater of the charges will be charged within the first few years of leases matching
the same with the depreciation prices charged on increased basis. As a result, this could affect
the suggested quantity of income each year that are used as a basis of contractual duties and
negotiations..................................................................................................................................5
Why was the change necessary....................................................................................................6
What changes have been incorporated in the new accounting standard for lease AASB 16......7
How will companies that have a significant level of lease financing be affected by the change
in the accounting standards for lease...........................................................................................8
Why did companies have a tendency to classify most of the lease contract as an operating
lease? How does positive accounting theory relate to this behavior of managers.....................10
How comparability would be increased by the AASB. Explain with the view of IASB..........11
Provide a possible explanation as to why after the implementation of AASB 16, reporting
entities might be more likely to buy more assets and lease fewer assets..................................12
Summarise the key disclosures the company has made on its accounting for leases including
on the transitional provision and effect of the transition to AASB 16 from AASB 117...........13
Conclusion.....................................................................................................................................15
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Introduction
The introduction of AASB 16 leases will result in a growth in leased assets and economic
liabilities on the Balance sheet of the lessee, at the same time due to this the EBITDA of the
lessee increases. Therefore, companies with various material balance sheet lease commitments
will encounter significant modifications in their key economic metrics together with leverage
ratio, return on invested capital (ROIC) and valuations. Hence this is seen that the equity value of
the company increases which leads to an increase in the value of the group of assets for the
company. So this is considered that the accounting policy has no longer impact on the economic
valuation of the company. It is seen that the AASB 16 will affects the valuation and will also
introduce the new interest areas in the valuation of M&A transaction of the company (Abbott
and Tan‐Kantor, 2018)
Main Body
Critical evolution of the old accounting standard for lease (AASB 117) specifically highlighting
the drawbacks.
Accounting standards refer to a common set of principle and procedures and standards that
interpret the foundation for accounting policies and procedures. The AASB 117 is one of the
accounting standards which turned into issued and was made relevant in Australia. This popular
standard was used to define the accounting processes to be accompanied by means of the lessor
and lessee stepping into a contract of lease.
Within the current time, the AASB 117 used for accounting for lease has been withdrawn and a
new accounting standard AASB 16 has been added that is known as an progressed model of the
AASB 117. The primary drawbacks of the AASB 117 are highlighted as below:
The accounting rules furnished under AASB 117 failed to reveal several newly developed or one
of a kind sort of rentals at the face of the balance sheet. The accounting model followed beneath
this trendy did not showcase the accounting facts in order to cater the wishes of the stakeholders
in addition to the users of the balance statements. The complexity of the disclosure necessities
relating to lease transactions and quantities made it tough for the entity to observe these types of
rules. The AASB 16 affords rules which assist within the disclosure of all of the numerical
amounts associated with the rentals on the balance sheet. Additionally, the regulations provided

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below AASB sixteen are simple, use Lehman's language and easy to implement inside the
accounting information in evaluation to the complicated provisions of AASB 117. There would
be a growth in the amount of debt and belongings said inside the monetary statements main to an
increase in the mentioned quantity of leverage. The accounting-primarily based debt covenants
will discover their implications thru the accelerated leverage quantity for the concerned entity.
The AASB sixteen reviews the lease prices in a way that they have a tendency to be front loaded
i.e. greater of the charges will be charged within the first few years of leases matching the same
with the depreciation prices charged on increased basis. As a result, this could affect the
suggested quantity of income each year that are used as a basis of contractual duties and
negotiations.
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Why was the change necessary
Financial statements have marvelous substances for internal and external stakeholders. It is
significant that they are showing true information about the company and regulates it. The chief
objective of accounting standards is to protect transparency, comparability, reliability and
consistency of the financial statement.
Accounting standards mostly assigned four major issues of accounting-
Evaluations of financial transaction'
Identification of financial outcomes
Presentation of financial statements in a fair manner
Disclosures that are required to protect stakeholders to provide any misleading
information.
The chief objective to apply these accounting standards is to ensure the reliability of financial
data of business and make transparency for accounting information (Bond, Govendir and Wells,
2016). Comparison is possible between inter and intra firms with the help of these accounting
standards. It also provides accounting treatment methods for many financial transactions.
There are many benefits of accounting standards like attains uniformity in accounting, improves
the reliability of financial statements, restrict the fraud and manipulations in the accounting
system and with the help of its auditors gets also assistance, it provides comparability for
accounting statements of a business, it assists to regulates managerial accountability. These all
are advantages to business entity, organizations and company who follow them but there are also
some limitations of these accounting standards.
Limitations of accounting standards are prescribed below-
Complications for selection among many options- in accounting system there are many
options to select any one alternative for apply accounting method or procedure in
organization for valuation and other accounting treatments. For instance, stock in a
company can be evaluated by life, filo or weighted average method. Management facet
many difficulties to choose any one method among all these. There is not an accounting
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standard that provides assistance to choose any one method for accounting, so this makes
a critical decision for management.
So, there is some disadvantages and problems of adopting or working with old accounting
principles. There are many advantages that attract organizations to follow them. For instance, it
creates a single set of rules of accounting standards, it reduces time or efforts to make any report,
it would less costly for making transactions in us, possess the flexibility and many more
advantages.
What changes have been incorporated in the new accounting standard for lease AASB 16
IAS 17 does now not have specific necessities for the presentation of right-of-use (ROU)
property and lease liabilities inside the economic statements. which means lessees have had to
rely upon the general guidance underneath IAS 1 Presentation of economic Statements and IAS 7
statement of cash Flows. In evaluation, IFRS 16 includes particular necessities for the
presentation of the ROU asset and rent liability and the corresponding results on the outcomes
and cash flows inside the primary financial statements.
IFRS 16 requires a lessee to either present in the declaration of monetary function or divulge in
the notes:
(a) right-of-use assets one by one from other assets. If a lessee does no longer present proper-of-
use property separately inside the statement of financial position, the lessee:
(i) consists of proper-of-use property in the same line object as that inside which the
corresponding underlying belongings would be provided if they were owned and
(ii) Discloses which line gadgets inside the announcement of monetary function encompass the
ones right-of-use belongings
(b) hire liabilities one at a time from other liabilities. If the lessee does not present lease
liabilities one after the other in the declaration of financial role, the lessee discloses which line
items inside the assertion of economic function consist of those liabilities.
However, proper-of-use belongings that meet the definition of investment assets are supplied
inside the announcement of economic role as funding assets.
In the old accounting system and accounting standards were not able to provide a single method
for all accounting procedures (Bozzolan, Laghi and Mattei, 2016).
Due to these hindrances, it has to change and make many changes in these accounting standards,

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and some changes are implemented in it that are prescribed below-
It allows for greater comparability- organizations can make better accounting records
with a comparison of these financial balances, it helps the business to compare its
financial statement with comparison to make accurate records and figures. With the help
of this business compare their records at different countries level when they are using the
same standards, rules and procedures. It also assists investors to identify that their
investment in the company is the right decision or not.
Beneficial for new and small investors- AASB makes new and small investors able to
make investments simple, easier and better quality with the help of it they can work
smoothly and professionally that is not possible with old accounting principles. This also
assists investors that they can identify their risk and reducing risk, professionals are not
able to take advantages from this.
It creates more flexibility- using these methods with rules, principles and many types of
standards will have the aim to attain reasonable valuation with many ways to complete
tasks. This would assist the business to apply AASB with their freedom in the accounting
system.
The new incoming financial standard having a significant impact on the applicability of these
accounting standards. The new standard has an impact on almost all business and this new
accounting standard are to be proactive and to be prepared (Brumm and Liu, 2019). After
changing in accounting standards the organizations will indulge cost of used leased and benefits
that are associated with it.
How will companies that have a significant level of lease financing be affected by the change in
the accounting standards for lease
New leasing standard AASB16 made significant changes for companies. Companies who made
applicable these standards being get affected in their financial activities and their financial
statements. It almost affects all business and being proactive and to be prepared for business and
organization.
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Firstly, the new accounting standards have changed the profile of expenses in the company.
Earlier times there have been more expenses but it changes with straight line lease expenses and
that impacts on profits and earnings of the company (Dakis, 2016). It will make a reason to
expand in metrics as like EBITDA, prior time there has been operating lease expenses but now it
has been changing through movement in expenses below the EBITDA line which has connected
to a range of issues. In addition to its financing reporting peculiarities, the lease is broken into a
non-current and current asset but non-current asset can be utilized.
There are many other changes that have been made after comes new accounting standards
prescribe below-
Many companies require for audit- the need for AASB16 is to identify both right to use
assets and lease liabilities in respect of what was priory operating lease. With the effect of
it grossing up the figures of balance sheet and there will be slightly incremented in both
side’s asset as well as liabilities in the company’s balance sheet (Tan‐Kantor, Abbott, and
Jubb, 2017). Australian companies need to have an audit if they reach defined criteria
where the prior companies need to determine their leased assets and if they reach under
that threshold limit they have to need an audit for the first time.
Mergers and acquisitions may be more challenging- the applicability of new leasing
standards having challenges for entities involving in acquisition business. It affects the
company's cash inflow and outflow and it incurs front-load expenses for the earlier part
of lease this affect profit share in the business in the sale agreement.
Ebitda changes may be significant- in this new accounting standard the lease expenses
that are removed. Now lessee can use his asset and determines the lease expenses as
depreciation expenses on the asset (Xu, Davidson and Cheong, 2017). For the lessee, it
will be right to use asset and depreciation expenses as his lease liabilities.
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Why did companies have a tendency to classify most of the lease contract as an operating lease?
How does positive accounting theory relate to this behavior of managers
Operating lease, it is a like contract in which the owner of the contract that is named as lessor
allows the user named as lessee to utilize an asset for a time period that is less than asset's
economic or useful life and it not gives any right to the lessee to sell this property or pledge it.
Lessor gives the right to the lessee in return for regular payments for a predetermined time period
(Davern and et. al., 2019).
The managers of the company decided to choose the method which includes the operating lease
method as this helps in leasing the asset of the company at the price which is crucial for the
company. The managers of the company wants to make this method as the prime method
because the company is holding the most of the asset with them in the operating lease. This is
considered that the company is considering to use the new accounting standard for there use as
the this helps in bringing the transparency in the accounting which is done by them. It is
considered to be one of the best method which helps invetors of the commpany to identify the
amount of fund that is blocked in the lease of the asset in the company.
Financial lease, it is a contract in which the lessor let out an asset to the lessee for repayments of
many in periodic time that is generally long time period. A financial lease is a long term concept.
In this type, lease ownership can be transferred to the lessee. It is a type of long term contract.
This contract can be said contract of loan or agreement of loan. In a financial lease, the lessee is
responsible to maintain and take care of asset. Their risk of obsolescence is being part of the
lessee. It can be cancelled on part of the lessee (Dunbar and Laing, 2017).
There are many benefits of the operating lease as well as financial lease like stakeholders who
have invested then there is no effect on their capital money in an operating lease. Operating lease
assist to find out the accurate value of assets with its operating lease factors (Xu, Davidson and
Cheong, 2017). Incorporate tax structure, the company have to pay tax on an asset that it
possesses but the operating lease is cost friendly because the tax on asset is deductible and that
can be decreed while filing up return forms. Operating leases includes all running expenses and
having less administrative charges. In operating lease there will be only one monthly payment
and that it is easily manageable by anyone (Holland, 2016).
In finance, lease lessor gets regular and assured income as a lease or lease an asset during the
time period of the lease contract. The lessor having not any risk and rewards it has to be

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transferred to lessee but there is an asset and its ownership is having by the lessor (Tan‐Kantor,
Abbott and Jubb, 2017). The tax benefits also enjoyed by the lessor. The business of leasing is
highly profitable because it is a rate of return based on the other hand lessee can utilize its asset
by paying a small amount each month. Leasing is a cheaper source of financing, the lessee can
get technical assistance from the lessor (Joubert, Garvie and Parle, 2017)
How comparability would be increased by the AASB. Explain with the view of IASB.
The objective of AASB sixteen is to make certain that lessees and lessors provide relevant
records in a manner that faithfully represents their hire transactions in their economic statements.
This fact gives a foundation for users of financial statements to assess the effect that leases have
on the economic position, financial overall performance and cash flows of an entity (Mao and et.
al., 2019).
The AASB 16 is to be considered by IASB very helpful to make a better comparison of finance
certitude. This is because organizations believe-
(a) For all lease s, exhaustive property and liabilities are provided
(b) Compare and value all the assets and liabilities in a different way
(c) Realise best the propriety which can be received and the liabilities which can be
incurred, through a hire.
The IASB concluded that supplying statistics approximately an enterprise’s undisclosed facts
and values of financial statements, lease s.
(Required by using IAS 17) isn't always sufficient (Matos and Niyama, 2018). This is due to the
fact that information:
(a) it is enough for some business and expert who regularly evaluate an agency’s assets
and lease indebted depends totally as per confined records provided with the aid of the use of
techniques that produce estimates which could range broadly and might not be correct,
(b) It is not conspicuous for other traders and experts who are having belief on an
agency’s balance record, profits record and coins flow announcement to offer data related to
monetary grip and facts related to property without analysing information provided in notes.
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Provide a possible explanation as to why after the implementation of AASB 16, reporting entities
might be more likely to buy more assets and lease fewer assets.
As specified before, the financial enteries and trasnsactions for lease and purchase of the
property could be considered to be similar with th AASB 16. It is seen that the IASB is very
much informed about the assessment of the porpertyw wherein the investors and the analyst
related to the AASB 16 are involved. Despite the fact of using the AASB 16 the purchase of the
shopes and the assets are frequently would not be documented the identical amount the financial
statements of the company which leases property (Svoboda and Bohušová, 2017). Through the
use of AASB 16, the company would help in determining the property that is best as per the
accountability through the lease process. This refers to the quantity that is recognised as the
property that is purchased through the process of lease is deemded to be exeptional from the
quantity that could be purchased (Morris, 2017). Through this monetary advantages can be
obtained without delay. Monetary advantages regarding the ownership of the asset are neglected.
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Summarise the key disclosures the company has made on its accounting for leases including on
the transitional provision and effect of the transition to AASB 16 from AASB 117.
The company which is taken for the purpose is the Woolworth which is an Australian stock
exchange company. This is seen that the company has used the AASB 16 lease and has updated
the standard for using in the company. Hence the disclosure that the company in their financial
statement did are:
AASB 16 related to leases provides updates for present financing necessities to lease is under
lease related to AASB 117 (Shields, Robinson and Plimmer, 2015). The application of mission
has made development in placing procedures related to finance, establishing a 2018 effect
evaluation, evaluation and comparability of transactions and continual rules, determining
information and system necessities, and establishing the application plan. The challenge indulges
participants from fiscal, exchequer and assets capabilities with failures from of primary
economic Officer.
The organization is considering to practice the AASB sixteen on 1 July 2019, this is used for
changing the backwards-looking procedures of the company. Consequently, the cumulative
effect of adopting AASB sixteen could be determined as an adjustment to the opening balance of
attained profit at 5 June 2019, without a restatement of qualify records. The classification is to
value the capacity effect of utilizing those practical changes (Sieverding, 2018). The institution is
having not any need to change for lease is in that it's far a lessor except in which it's far between
lessors in a sub-lease.
Anticipated effects,
On consolidated declaration OF monetary role AS AT 14 September 2018.
Latest hire indebted $14.0 to $18.0
Accountability-of-utilize property $12.0 to $13.
The overall impact through brand new hire ineptness and proper-of-utilize property, compare for
the assessed tax and the revert back of the present instantly-line hire and stimulate ineptness of
$215 million as mentioned in documents three.10, might be regarded towards calculated income
in the balance sheet.
The effect particularly relating with the group’s assets lease s for retail premises, storerooms
facilities, distribution centres, and help workplaces (Steenkamp and Steenkamp,2016) the real
and main effect of implementing AASB 16 for financial statements inside the duration of

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preliminary utility will rely on destiny financial conditions, inclusive of the institution’s
borrowing price at 5 July, the quantity to the organization select to apply sensible benefits and
reputation exclusions, and the latest procedures related to finance, which can be impracticable
for organizations to show their primary financial sheets that having starting date.
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Conclusion
From the above study this is ana;ysed that, for many organisation, lease performs the key role in
the commercial operations that are done by them. However this is seen that maximum leasing
transactions that are done in the organisation are keep up with the contemporary lease balancing
method, they were preferring to have the IAS 17 in the application that is done by them and does
not require any other acccoutnign standard. But with the new standard tha the business enterprise
do greater than duly changing to operatig lease and the showcased the assets in the brans new
form. The implementation of the new policy helped in bringing the new policies, stratefiesn and
control which helps in assisting the accounting for lease and the finalising the lease and tax
management in the company.
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