Impact of IFRS 16 on Financial Reporting

This finance assignment focuses on the implications of IFRS 16, a new accounting standard for leases. It delves into reasons behind the previous standard's inadequacy in reflecting economic reality, the consequences of operating leases being off-balance sheet, and the potential impact of IFRS 16 on comparability and decision-making. The assignment also explores challenges associated with implementing IFRS 16 and its overall effect on corporate financial reporting.

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
University Name
Student Name
Authors’ Note

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Table of Contents
Solution to Question i)...............................................................................................................2
Solution to Question ii)..............................................................................................................4
Solution to Question iii).............................................................................................................4
Answer to Question iv)..............................................................................................................5
Answer to Question v)...............................................................................................................5
References..................................................................................................................................7

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Solution to Question i)
Reasons why chairperson of IASB believes that the former accounting standard for
leases did not replicate economic reality
As mentioned in the given case the chairperson of IASB is of the view that the former
accounting standard for particularly leases did not necessarily reflect economic reality. As
such under present accounting necessities, over and above 85% of the leases are referred to as
operating leases and are not registered on business concern’s balance sheet. Distinctly, the
accounting unit necessarily does not replicate economic reality. Regardless of operating
leases that is presented off the firm’s balance sheet, there remains no doubt regarding the fact
that they generate authentic liabilities. Particularly, during the period of worldwide financial
crisis, there were certain leading retail chains that went insolvent as they were not capable to
adjust rapidly to the novel economic reality (Choubey 2016). Also, the firms had
considerable operating lease commitments in the long-term on the firm’s stores, and
nevertheless had deceivingly lean balance sheets. However, in actual fact liabilities presented
off the balance sheet lease were more than 66 times higher than debt pronounced on firm’s
balance sheet. In addition to this, the present accounting for leases directs towards a
inadequacy of comparability. As per the existing status, the corporations operating under
IFRS essentially lease assets as well as commitments that amounts to nearly $3.3 million, and
out of that nearly 85% are operating leases. Again, in a bid to compensate the same, the
financiers mainly comprise of the projections that are not consistent, that are not in
agreement, incomparable as well as inaccurate (Edeigba and Amenkhienan 2017). Thereafter,
this is nearly cited that previous accounting standard failed to replicate economic reality.

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Solution to Question ii)
As per the previous accounting standard, most of the corporations have registered around
85% of leases particularly realising the specific amount under operating leases. In particular,
it did not reflect the ones stated under statement of financial position. Although the operating
leases have not been registered under the pronouncement of financial position, there has been
generation of firm’s actual liabilities (Öztürk and Serçemeli 2016). Therefore, during the
period of financial crisis, there are certain retail corporations that have crumpled, as they
failed to adjust quickly to economic reality. Also, the business concerns also had considerable
commitments linked to the operating leases of the long term period. However,
pronouncements of financial position of the firm have essentially been lean misleadingly.
Therefore, the lease liabilities of the business concern under the arrangement and scheme of
off balance sheet essentially been 66 times more in comparison to the values of the debt
mentioned in the balance sheet assertion.
Solution to Question iii)
The previous system of accounting associated to lease could lead to failure of comparability
(Öztürk and Serçemeli 2016). Essentially, the aviation sector accounts most of the leases
specifically in the structure of operating leases and the documentation is not carried out under
the statement of financial position. Therefore, Airline Corporation engaged in the process of
leasing all the aircraft fleet is necessarily not similar to that of the competitors buying all
fleets. Nevertheless, the financial necessities of both categories of airline corporations are not
unrelated. As such, this indicates towards the fact that there is nonexistence of level playing
field among different airline corporations (Marshall 2016). In addition to this, with the
initiation of novel standard, all kinds of leases can be specifically accounted as assets and

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leases would help in maintain documentation in the liability form. Therefore, it can be hereby
approximated that the identified issues can be addressed and resolved.
Answer to Question iv)
Any kind of alteration in the standard of accounting is likely to exert impact on
approximately half of the business concerns that are listed and are not anticipated to be
popular with all the corporations. However, the primary reason behind the same is that the
alterations might perhaps direct the way towards controversies. Consequently this could
result in development of warning effects associated to negative economic circumstances and
costs related to the alterations in the specific system (Marshall 2016). For instance, banking
covenants along with contractual agreements attached with the financial statements of the
corporation for instance profit targets to arrange bonus disbursements to the members of the
staff or else gearing ratio might possibly be needed for acquiring revisions before the process
of insinuation of novel standards. Additionally, each segment of business calls for the need of
obtaining deep insight of the impact of alteration that includes information technology,
human resource, finance as well as finance department of financiers of investor associations
and assets procurement (Choubey 2016). However, all these causes might perhaps lead to
lack of recognition of new accounting standard.
Answer to Question v)
IFRS 16 will necessarily not alter the nature and characteristics of leases and that can be
considered as an accountancy necessity. This implies that leases will still remain to be
attractive and supple sources of finance for corporations for corporations that necessarily do
not intend to put up with the risk of owning equipment/plant/premises. Whilst there will be a
cost in the process of execution of IFRS 16, corporations are not required to put leases worth
below $5000 or else with a duration not more than 12 months mentioned in the balance sheet

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(Choubey 2016). This is said to shield smaller corporations from some of expends. According
to the new standard of accounting, it can be observed that most of the corporations are
treating operating leases as off balance sheet specific. Accordingly, the financiers along with
other users of financial pronouncements fail to acquire an effectual insight of financial
circumstance of the corporation (Marshall 2016). Essentially, this limits them to compare the
corporations leasing assets with the purchasing assets of the corporation. Nevertheless, the
novel standard is approximated to update the standard IFRS 16, plus it is expected that it
would necessarily outweigh the costs, that again would direct towards greater informed
decisions associated to investment (Choubey 2016). In actual fact, this would be reflected in
the lease against buying decisions in an effectual manner on the part of the management.

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References
Choubey, S., 2016. IFRS 16 Leases. The MA Journal, 51(2), pp.91-94.
Edeigba, J. and Amenkhienan, F., 2017. The Influence of IFRS Adoption on Corporate
Transparency and Accountability: Evidence from New Zealand. Australasian Accounting,
Business and Finance Journal, 11(3), pp.3-19.
Marshall, D., 2016. Accounting: What the numbers mean. McGraw-Hill Higher Education.
Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard" IFRS 16 Leases" on
Statement of Financial Position and Key Ratios: A Case Study on an Airline Company in
Turkey. Business and Economics Research Journal, 7(4), p.143.