(Doc) Accounting Theory - Assignment
Added on 2020-03-23
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Accounting Theory
Solution 1The present section aims to provide an analysis of a current accounting article related to atopic of accounting regulation. The article selected for the purpose is ‘Global accountingstandards to test tenants’ published in August, 2017, in The Sydney Morning Herald. The articlerelates to the current changes proposed in the IASB/AASB standards regarding the recognitionand measurement of corporate leases (Cummins, 2017). The article analysis will aim to provide atheoretical understanding of the various concepts and issues demonstrated in the article. Article Analysis:As per the article, the IASB (International Accounting Standards Board) have proposedaccounting changes in relation to the measurement of leases. The changes will have a significantimpact on the accounting standards adopted by AAASB (Australian Accounting StandardsBoard) as AASB is converging with IASB standards with the objective of achievingharmonization of accounting standards. The new rules are likely to have a profound effect on thefinancial statements by transferring significant amount of debt liabilities in the balance sheet(Chalmers et al., 2012). The AASB has adopted compliance with the proposed IASB changesunder its AASB 16 that will applicable to all the leases not just only real estate leases. The articlehas discussed the challenges that will be faced by the Australian corporate sector for adoptingwith the new global accounting standard developed in relation with the corporate leasing(Cummins, 2017). The new changes will have a major influence on the corporate accountingsystem and processes and will tend to increase the liabilities of a corporation (Carmona andTrombetta, 2010).The AASB has introduced changes in its current accounting standard of leasing as perwhich any indirect lease costs such as lease fees, deign fees, surveys and all other relatedobligations should be recognized as indirect lease costs. Thus, there will be a large impact on theleases structure adopted by business companies in Australia as the proposed changes willsignificantly influence the accounting of leases in the financial statements (Gaffikin, 2005). Thenew standard requires the business companies to report all their operating leases on the balancesheet and thus present a major financial reporting challenge before the business entities inAustralia. The AASB is incorporating the changes in its lease standards in order to improve the
quality of financial reporting as per the IAS reporting rules. This is done in accordance with thenormative theory of accounting which states that the main objective of financial reporting isprotect the interests of end-users (Cummins, 2017). The normative theory of accounting helps in providing guidance to the accountingprofessionals in developing the new accounting standards that improves the qualitativecharacteristics of financial information. The theory has helped in developing the conceptualaccounting framework as per which the development of a high-quality financial statementsdepends on the relevancy, reliability, comparability and understandability of the informationprovided during these statements (Cummins, 2017). Thus, the proposed standard will improvethe reliability, relevancy and understandability of the financial information for the end-users bydisclosing all the information relating to the operating leases not only just reporting theinformation of real estate leases. As such, the proposed changes in the AASB standard regardingthe measurement of operating leases can be stated in accordance with the normative accountingtheory. The theory seeks to define the objective of general purpose financial reporting to providefinancial information that is helpful in decision-making of the end-users such a s investors andcreditors (Vorster, 2010). The article in this context has also stated that there will be large impact on the interestcoverage and return on capital of the company that will gradually decline since the adoption ofnew standards. The article has stated that the business companies operating in Australia have toencounter many new operational challenges besides financial reporting challenges in order tocomply with the new accounting rules of corporate leasing. This is because the identification andrecognition of operating leases will bring large-scale changes in the operational procedures of abusiness entity. The business companies shave to modify its present operational processes inrelation to impairment testing, credit ratings and tax accounting for identification and recognitionof its operating leases. This will require significant investment on the part of the companybesides requiring large amount of time and efforts for implementing the changes in its businessoperations as per the new AASB 16 standards (Gaffikin, 2007). The companies have to reportamortization and interest expenses in its profit and loss statement of the increasing debt liabilitiesas per the new standards. The disappearance of the rental expenses will significantly increase theEBITDA of the company but will be offset by the increasing debt liabilities of the company. The
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