Accounting Theory and Current Issues: A Critical Evaluation of AASB 16

ACCOUNTING THEORY AND CURRENT ISSUES 1
Accounting Theory and Current Issues
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Abstract
The birth of AASB came about as a result of concerns that arose about integrity in the
way leases were being obligated. So as to reduce these issues,the FASB and IASBcame up with a
new set of requirements to harmonize all assets and liabilities of the lessee. The lack of lease
information meant that analysts and investors were in darkness and therefore cannot make
comparisons of companies nor be able to purchase assets. This led to the formulation of a new
set of requirements to guide leasing(AASB 16), that consequently replaced AASB 117.

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Introduction
The IASB has come up with a new set of requirements for leasing (AASB 16), replacing AASB
117.the IASB coordinated with the IFRS to come up with this new standard. All companies were
required to rollout this new standards as from January 2019. The IASB and the IFRS agreed on
many areas, especially the requirementfor leases should be captured on the balance sheet.
Critical evaluation of the old accounting standard for lease (AASB 117) specifically
highlighting the draw backs
One of the major drawbacks of the AASB 117 standard of lease was its difference between the
accounts of the lessee and the leases of operation (Joubert, Garvie& Parle 2017).With the
application of this lease of standard, all leases that would be similar economically are most likely
to be reported differently in the balance sheet. Applying AASB 117, the burden of accounting
largely depended on comparing payments of the lease with the value of the asset, depicting an
assessment that purely rested on the judgement of an individual. Thus, a small difference as
regards with the conditions and terms of the leases could result to a big change in accounting
reporting. This limited comparability between companies and offered few opportunities for
structuring of transactions in order to realize a targeted result of accounting (Cheong, Kim and
Zurbruegg, 2010). AASB 16 is expected to decrease the opportunities for restructuring of leasing
transactions in order to realize off-balance sheet accounting.
In AASB 117, a good number of leases did not support the consideration of liabilities and lease
items. Therefore, companies that obviously show a notable difference in the off balance sheets
would be seen to be similar in their financial and performance report. However, this drawback
has been overcome in AASB 16 as any differences in leasing portfolios would be captured in the
balance sheet. Applying AASB 16, all changes in the companies’ leasing portfolios would be
captured in the balance sheets. Applying AASB 117, the change would have only been reflected
in the balance sheet if only the lease was considered as a finance lease, or when an operating
lease would be changed to become a finance lease. For example, if a company would make a
change in its portfolio such that the portfolio consisted in 10 year lease in the off balance sheet as
opposed to a five year lease in the balance sheet. In this case, the company commitments and the
economic stand of the company would not be captured in the balance sheet of the particular

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company that is applying AASB 117. Additionally, the change would not be reflected in the
statement of income of the company or in the statement of cash flow (AASB 2015).
AASB 117 was majorly focused on determining whether a lease can be associated with
purchasing property that is out for leasing. If a lease is considered to be equal to purchasing the
underlying property, the lease would be categorized in the category of a finance lease that is
commonly called a ‘capital lease.’ In this lease standard, every other lease was put in the
category of operating leases, which consequently would not be captured in the balance sheet of
the company (Bond, Govendir and Wells, 2016).
Why was the change necessary?
It was necessary to change the Lease standard because the AAS 17 was laden with many
drawbacks and limitations. The IASB in coordination with FASB, saw the need for harmonizing
lease accounting. One of the most notable areas that called for this change is the requirement for
leases to be captured in the balance sheet, and that leases be clearly defined and liabilities be
properly measured. Furthermore, the two bodies (FASB and IASB) agreed to maintain the
requirements of lessor accounting as maintained in the AASB 117. Whileaccounting in the lessor
category has changed drastically, and there is no change to do with lessors. The new ruleset out
in this new lease release will ensure that the state of affairs in the financial state is correct, and
that it is properly reflected in the balance sheets. Furthermore, the new release ensures that
lenders will be subjected to a better understanding of the risk that is involved in lending to a
lessee (Ahmed&Alam2012).
It was necessary for the change to be there so as to reduce the administrative costs as the rules do
not apply to leases that are less than 12 months, and to leases that apply to small asses.
What changes have been incorporated in the new accounting standard for lease AASB 16?
The most notable change in AASB 16 is the fact that the new standard of lease informs lenders to
better understand all risk that is involved while lending to lessees. Furthermore, the new lease
will disrupt operation of all leases that deal with both movable and immovable assets, except for