Lease Accounting Standards: An Analysis

This assignment examines the significant improvements introduced by the new lease accounting standard. It highlights how the standard enhances calculations, contract terms, and lease asset relevance for lessees' operations. The analysis emphasizes the economic considerations incorporated into the new standard and its impact on investor decision-making by eliminating the need for rough estimates of operating lease accounts. Additionally, the assignment explores the benefits of increased comparability between companies and the advantages smaller entities gain under the new standard.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
Name of the university
Name of the student
Authors note

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Table of Contents
Assessment Task Part A:.................................................................................................................2
Requirement i).................................................................................................................................2
Requirement ii)................................................................................................................................2
Requirement iii)...............................................................................................................................2
Requirement iv)...............................................................................................................................3
Requirement v)................................................................................................................................3
Requirement vi)...............................................................................................................................4
Requirement vii)..............................................................................................................................4
Requirement viii).............................................................................................................................5
Assessment Task Part B:.................................................................................................................5
Requirement i).................................................................................................................................5
Requirement ii)................................................................................................................................6
Requirement iii)...............................................................................................................................7
Requirement iv)...............................................................................................................................7
Requirement v)................................................................................................................................8
References list:...............................................................................................................................10

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Assessment Task Part A:
Requirement i)
The evidence of impairment of individual trade receivables leads to recognition of
provision for impairment loss. It can be ascertained from the latest annual report of WHK limited
that trade receivables have been tested for impairment. Total amount of trade receivables that
have been impaired stood at pre tax value of $ 5.4 million. Cash flow from impairment for trade
receivables for year stood at $ 2223000 in year 2011 compared to $ (341000) in year 2010 when
there was negative cash flow generated from impairment (Delisted.com.au 2018).
Requirement ii)
Assessment of impairment of all assets is done by evaluation of conditions that are
regarded particular to the group and any specific assets that might lead impairment. Impairment
triggers that existed at reporting date is not considered by management and organization does not
carry impairment of such assets. Impairment of assets is performed annually by making any
adjustment in actual run off and trail run off (Macve 2015).
Impairment testing of goodwill is conducted by WHK limited in three ways. In first
method, allocation of carrying amount of goodwill is attributed to the cash-generating unit.
Determination of recoverable amount of goodwill for all cash-generating units is based on value
in use. Allocation of goodwill is done to such units if that has been acquired through business
combination identified through country of operations and business segments (Bohušová 2015).
Impairment testing for goodwill is conducted annually according to accounting policy.

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Requirement iii)
Determination of recoverable amount of goodwill is done for all cash-generating units
that is based on value in use calculations using the projections of cash flow. Forecast of cash
flow is performed by making the assumption such as growth rate, discount rate and gross
margins. Aggregate carrying amount of cash generating unit cannot exceed recoverable amount
if there is any possible changes in key assumptions. Value in use calculations forms the basis of
recoverable amount of cash generating units. Organization conduct evaluation of conditions
those are specific to particular assets such as economic environment, demand financial and
professional services and any possible changes in legislation (Lin et al. 2017).
Requirement iv)
Impairment of intangible assets such as goodwill is assesse according to accounting
policy adopted by standard. Assets are tested for impairment on annual basis by making
adjustment for any differences in experiences of actual run off and trail run off. Recognition of
impairment loss is done in the statement of profit and loss. WHK limited recognized the
provision of impairment of assets such as trade receivable when there is indication that it will not
be recovered in future. Loss related to impairment is discounted at effective interest rate by
making comparison between the present value of estimated future cash flow and carrying amount
of assets (Horton 2018).
Requirement v)
Existence of any subjectivity in estimates of organization will help in accuracy of an
impairment testing. The recoverable amount of assets in organization is determined by making
judgments in respect of parameters and input. In this aspect, it is required by organization to
carefully consider international accounting standard. Possibility that assets will be subjected to

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impairment is influenced by economic climate of specific regions and jurisdictions. WHK
limited complied with accounting policies and standard while carrying out impairment of assets.
Therefore, it can be said that impairment reporting process of organization is subjected to low
degree of subjectivity (Krivogorsky 2015). However, key assumptions, estimates, and disclosure
of uncertainty estimation are prone to subjectivity.
Requirement vi)
Assumptions and estimates about impairment testing differ from one organization to
another. Understanding the process of impairment testing of WHK limited seems to be
interesting as it depicts all the factors that should be considered in evaluation of impairment of
assets. Analysis of annual report of WHK limited depicts that accuracy impairment test is
affected by many internal as well as external factors. Involvement of subjectivity involved in
carrying out impairment makes the outcome of impairment of assets considerably different and
this is done by not adhering to accounting standards and policies (Wong and Joshi 2015).
Requirement vii)
It can be evaluated from analysis of annual report of WHK limited that organization has
conducted impairment of trade receivables. Organization conducts impairment or impairment
testing when there is objective evidence that it is not possible for the group to collect receivables.
Generally, when there is likelihood that group will not be able to collect receivables, the make
the provision of doubtful debt (You 2017). However, group in the current annual report dates
2011 has made provision for impairment related to trade receivables. Therefore, new information
has been gained in respect of impairment provisions.

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Requirement viii)
Financial report of organization is prepared in accordance with Australian accounting
standard that is issued by International Accounting standard board. Financial liabilities and
financial assets of organization are held at fair value recognized through loss and profit.
Measurements of financial assets are done at fair value and the cost of business combination is
allocated to fair value of assets assumed at acquisition date. Determination of fair value is done
by model of binomial valuation by making assumptions (Lim et al. 2014).
Assessment Task Part B:
Requirement i)
One of the most important activities of any organizations is lease and majority of leased
assets are not reported on balance sheet of lessee under existing lease standard. Critics of existing
standard is attributable to the fact that users are not provided faithful representation of leasing
transactions and thereby failing to provide with user requirement. Lease are classified as capital
and operating lease and existing standard only requires to account for capital lease liabilities and
assets on balance sheet. Different economics are involved in variety of lease transactions and
absence of their disclosures does not reflect economic reality to users (Lee et al. 2014). Amount
of leases presented in the financial report can be substantial and lack of transparency leads to
provide deceptive information to investors.

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Requirement ii)
Existing accounting lease standard requires disclosures of only capital lease assets and
liabilities and operating lease assets and liabilities are not obliged to be disclosed in the financial
report of reporting entity. It is certainly possible that an organization will have thousand of lease
assets and liabilities that are not depicted in financial metrics. This would lead to understatement
of total amount of liabilities. This makes total liabilities mentioned in reported balance sheet of
entity multiple times lower than liabilities that are off balance sheet. Moreover, calculations of
substantial obligations to lease is done by making assumptions that results in lack of accuracy
and thereby transparency (Vimpari and Junnila 2017). All the discussed factors make off balance
sheet liabilities 66 times higher than on their on balance sheet.
Requirement iii)
Financial position of airline companies can be difficult to be evaluated by investors.
Reason is attributable to the fact that the financial position of company buying assets and leasing
assets might be actually different. However, in actual scenario, the financial position of
companies is significantly different from companies leasing most of its aircraft fleets and
companies buying most of its fleet. Evaluation the financial leverage and operational flexibilities
of these companies becomes difficult for investors (James 2016). Therefore, it can be said that
there is no level playing field between airline companies under current lease standard.

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Requirement iv)
There will be wider implications for organizations adopting new accounting standard in
terms of change in internal control and systems of doing business. Adoption of new standard
requires additional cost for business, as they need to upgrade their system in an attempt to gather
adequate knowledge. Several criticism against new standard include higher costs as balance
sheet of lessee will appear more leveraged. Furthermore, management is required to assess
knowledge adequacy concerning the implementation of new accounting standard for lease.
Implementing the new standard would lead to alteration in financial metrics. Organization will
be required to incur additional costs and thereby reducing the total amount of profits reported
(Smyth 2015).
Requirement v)
Under new lease standard, lease term will require judgments in terms of relevant facts,
recognition of lease liabilities and circumstances identification. Organization will exercise
leasing options that will lead to reasonable uncertainty concerning economic reality. All the
relevant actors pertaining to lease accounting in an organization such as contract based, assets
based, market based and entity based and considered. Leasehold accounting will be improved
significantly in terms of calculations, contracts terms and conditions, practice concerning lease
and underlying assets relevance concerning operations of lessee. Economic reasons associated
with leases will also be considered in new accounting standard. Under the existing standard,
investors are required to make a rough estimate about operating lease accounts. New standard
will not require investors to make estimate and do rough calculations for adding back lease
liabilities or assets to balance sheet (Macve 2015). Moreover, new standard for leases will

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facilitate comparison between companies and smaller companies will receive more benefits. All
this will assist investors in having informed decisions while making investment to any reporting
entity.

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References list:
Bohušová, H., 2015. Is Capitalization of Operating Lease Way to Increase of Comparability of
Financial Statements Prepared in Accordance with IFRS and US GAAP?. Acta Universitatis
Agriculturae et Silviculturae Mendelianae Brunensis, 63(2), pp.507-514.
Delisted.com.au. (2018). WHK GROUP LIMITED WHG - Profile and Status | deListed
Australia. [online] Available at: http://www.delisted.com.au/company/whk-group-limited
[Accessed 8 Jan. 2018].
Horton, J., 2018. Advanced Financial Accounting and Reporting: Theory, Practice and
Evidence. Routledge.
James, M.L., 2016. Accounting for Leases: A Case Exploring the Effect of the New Lease
Accounting Standard on the Financial Statements. Journal of the International Academy for
Case Studies, 22(3), p.152.
Krivogorsky, V., 2015. ACCTG 501 Advanced Financial Accounting.
Lee, B., Paik, D.G. and Yoon, S.W., 2014. The Effect of Capitalizing Operating Leases on the
Immediacy to Debt Covenant Violations. Journal of Accounting and Finance, 14(6), p.44.
Lim, S.C., Mann, S.C. and Mihov, V.T., 2014. Market Recognition of the Accounting Disclosure
and Economic Benefits of Operating Leases: Evidence from Borrowing Costs and Credit
Ratings.
Lin, K.C. and Graham, R.C., 2017. How Will the New Lease Accounting Standard Affect the
Relevance of Lease Asset Accounting?.

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Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Smyth, C., 2015. Lease lapses, development collapses. Park Watch, (262), p.4.
Vimpari, J. and Junnila, S., 2017. Valuing retail lease options through time: Volatility spread
between different types of retailers. Journal of Property Investment & Finance, (just-accepted),
pp.00-00.
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key
ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3),
p.27.
You, J., 2017. The Impact of IFRS 16 Lease on Financial Statement of Airline
Companies (Doctoral dissertation, Auckland University of Technology).