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MA601 Theory and Current Issues in Accounting | Melbourne Institute

   

Added on  2019-10-31

11 Pages2841 Words145 Views
Running head: ACCOUNTINGAccountingName of the UniversityName of the studentAuthors note

1ACCOUNTINGTable of ContentsIntroduction:...............................................................................................................................2Discussion:.................................................................................................................................2Answer to question a:.................................................................................................................2Answer to question b:.................................................................................................................3Answer to question c:.................................................................................................................4Answer to question d:.................................................................................................................4Answer to question e:.................................................................................................................5Answer to question f:.................................................................................................................5Conclusion:................................................................................................................................8References List:..........................................................................................................................9

2ACCOUNTINGIntroduction: During the financial crisis, many organizations are not able to adjust to real economicsituations while complying with current accounting requirements. Economic reality is notreflected by today’s accounting system. New standard for leases has been issued byInternational accounting standard boards that calls for the need of recognising the leases onthe lessees’ balance sheet. The amount of leases is to be recognized as liabilities of leases thatcorrespond with right of use of assets. Different decisions are taken with respect tomeasurement, classification, presentation and recognition of leases for both lessors andlessees that does not make the new standard fully converged. A dramatic change is presentedto the balance sheet of lessees by the new leasing standard by updating accounting to alignwith certain changes in model of lessee and new revenue recognition standard (Bailey, 2013).Discussion:Answer to question a:Significant efforts are not recognized under the current standard of lease as most ofthe lease transactions are off balance sheet. Organizations operating sector such as airline,shipping and retail segments have around three trillion euro’s worth of leases and record ofsame is not mentioned in the balance sheet and are labelled as operating leases. Recordingleases value off balance sheet does not indicates that there will not be creating real liabilities.This makes them unable to quickly adjust to ongoing economic situation. Not recoding theleases in the balance sheets indicated that such organizations are maintaining lean balancesheets (Riley & Shortridge, 2013). However, leased liabilities recorded off balance sheetswere quite higher than amount of total debt reported in their balance sheet. All thiscontributed to not reflecting underlying economic in a better way.

3ACCOUNTINGOperating leases is not featured in balance sheet of entities under current leaseaccounting and there is no representation of many liabilities and assets. Thousand worth ofassets under agreement of operating lease that is nit depicted clearly in financial metrics leadto understatement of liabilities. This will not give real situation of organization and does notincorporate the ongoing economic scenario. Answer to question b: The off balance sheet of reporting entities under former accounting standard were 66times greater than their total value of debts reported on balance sheet. In regard to this, therewere critics for guidance on current lease accounting. Reason that criticized is the fact thatcurrent standard allowed the future lease payments and other leased assets to be excludedfrom balance sheets of reporting organization. Moreover, for similar economic transactions,there was considerably different accounting as they used budget line threshold. Standardsrequire virtual recognition of leased assets and payments that leads to presentation ofdeceptive balance sheets and all expenses related to lease were front loaded (Beckman,2016). For the operating leases as per current standard, there is straight line expense and anyincrease in operating lease expenses are included and depreciation and amortization areincluded in the computation or measurement of profit. All such expenses are not accountedfor or disclosed in balance sheets and in reality there are increased expense with increase invalue of operating leases. Furthermore, under current leasing standard, there is no need torecognize the all leases in their balance sheet along with no obligations for future leasepayments. Current lease accounting puts burden on organization for maintaining separate setof books for the purpose of covenant calculations (Cheng, 2015). All this make look balancesheet in a better position and making it attractive in investor’s eyes. In reality, there areincreased debt obligations and higher amount of off balance sheets liabilities.

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