Lease Accounting & Investor Analysis

This assignment delves into the complexities of lease accounting, particularly its influence on financial reporting by airline companies. It examines how the new lease accounting standard impacts financial leverage comparisons between leasing and purchasing fleet models. Additionally, it discusses the operational and financial challenges faced by businesses adopting the new standard, including changes in internal controls, system updates, potential profitability reduction, and covenant breaches. Finally, it highlights the benefits of transparent lease accounting for investors, enabling them to make informed decisions based on a complete financial picture.

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

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ADVANCED FINANCIAL ACCOUNTING
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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ADVANCED FINANCIAL ACCOUNTING
Assessment Task Part A:
Requirement i)
From the analysis of annual report of GUD holdings limited, it can be ascertained that
organization has written down value of some assets. This comprise of impairment of brand
names, goodwill, product development and inventory1. Organization has also undertaken
impairment of Dexion resulting from recent performance of trading. Amount that was charged
under inventory impairment involved $ 1 million.
Requirement ii)
Organization conduct annual impairment of both tangible and intangible assets whenever
there is an indication of conducting impairment. There are various factors considered by entity
while conducting impairment such as fair value, recoverable amount and value in use. Assets that
do not have possibility of conducting impairment individually are grouped into cash generating
units and they are subjected to operating segment ceiling test. Aggregation of cash generating
unit to which goodwill have been allocated reflects the lowest level at which impairment testing
has been done. Future cash flow of assets is estimated by discounting to their present value using
discount rate for value in use assessment2. Carrying amount of cash generating unit are compared
to their recoverable amount for testing the impairment of goodwill and other intangible assets.
1 Ghani, Erlane K., and Kamaruzzaman Muhammad. "The Effect of Freemind on Students’ Performance in an
Advanced Financial Accounting Course." International Journal of Academic Research in Business and Social
Sciences 6, no. 7 (2016): 262-275.
2 Haskin, Daniel L., and Megan M. Burke. "Incorporating Sustainability Issues Into The Financial Accounting
Curriculum." American Journal of Business Education (Online) 9, no. 2 (2016): 49.

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ADVANCED FINANCIAL ACCOUNTING
Requirement iii)
GUD holdings limited has recorded impairment expense in financial year 2016 by
amount $ 76697000 and there was no such expenditure recorded in year 2015. The impairment
charge for its business segments that is Davey and Dexion stood at $ 1000 million, $ 75695
million and resulting and continuing operations of $ 766970003.
Requirement iv)
Recognition of impairment is done immediately in the income statement and there is no
subsequent reversal. Calculation of value in use is done by making the assumptions about
projections cash flow. The appropriateness of methods employed for the impairment of assets is
evaluated by the organization by making assumptions about calculations of value in use.
Management of organization makes estimation about impairment of assets based on
experience concerning their historical loss. Estimates are made for determining recoverable
amount of assets and impairment losses are recognized resulting from change in estimation that
is recognized in the income statement4.
Requirement v)
It has been ascertained from conducting analysis of annual report of GUD holding limited
that the process of impairment testing involved few degree of subjectivity. Involvement of
subjectivity has the possibility of significantly influencing the impairment-testing outcome.
Managers are provided with opportunistic behavior when there is involvement of subjectivity as
calculation of recoverable amount of cash generating unit is subjected to discretion. Therefore, it
3 Gud.com.au. (2018). Annual Reports & Reviews - GUD. [online] Available at: http://www.gud.com.au/annual-
reports-reviews [Accessed 6 Jan. 2018].
4 Hoskin, Robert E., Maureen R. Fizzell, and Donald C. Cherry. Financial Accounting: a user perspective. Wiley
Global Education, 2014.

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ADVANCED FINANCIAL ACCOUNTING
is projected by analysis of annual report that there was no sort of subjectivity involved in
impairment testing.
Requirement vi)
The methodology and techniques involved in testing of impairment of assets differs from
organization to organization. Hence, it is always interesting to understand the impairment testing
of particular organization as it enables viewer and analysts to gain new knowledge about the way
organization is conducting impairment. GUD holding limited provides segmented information
about impairment testing of different assets and there is a clear presentation of costs involved in
carrying out impairment5. It has been found that calculation in impairment of financial assets
have been done by employing a new expected credit loss model.
Requirement vii)
The way companies are conducting impairment testing of assets have simplified in recent
years as per the guidance released by Financial accounting standard board. Such method involves
lower cost and fewer efforts on part of management. Organizations conducting impairment
testing has the option of performing both qualitative and quantitative assessments6. Nonetheless,
it is considered appropriate to perform qualitative and quantitative assessment of impairment of
assets that will assist users of annual report in undertaking accurate decision.
5 Jalil, Abdul, Nor Azah Binti, and Hasnah Binti Haron. "The Association Between Prior Knowledge and Learning
Approaches, in Performance in an Advanced Accounting Course." Advanced Science Letters 21, no. 4 (2015): 922-
925.
6 James, Marianne L. "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, no. 3 (2016): 152.

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ADVANCED FINANCIAL ACCOUNTING
Requirement viii)
Fair value measurement is about estimation of price at which the transactions of
transferring liabilities and selling the assets is done at present conditions of market so that it
reflects true value. GUD holding limited recognize adjustments to fair value of hedging reserves
in the consolidated statement of comprehensive income. Any changes in cash flow hedges fair
value is transferred to inventory. Measurement of derivatives and other financial instruments are
done at fair values that are not qualified hedging accounting. There is immediate recognition of
any changes in derivative instruments fair value Measurement of financial liabilities and assets
are done at fair value through loss or profit.
Assessment Task Part B:
Requirement i)
In the former accounting standard for leasing, there was ignorance of criteria for
determining capital lease. Previous standard did not require organizations to report their
operating leases on statement of financial position or balance sheet. As a consequence of this,
there was no actual assets and liabilities representation. There is underestimation of actual
amount of liabilities, as large volumes of assets are not incorporated in financial metrics.
Investors viewing annual report were deceived as the total amount of liabilities reported in
balance sheet was considerably lower than off balance sheet liabilities7. Moreover, there were
arbitrary calculations involved in determining substantial obligations pertaining to leases. Hence,
former accounting standard failed to reflect economic reality.
7 James, Marianne L. "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, no. 3 (2016): 152.

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ADVANCED FINANCIAL ACCOUNTING
Requirement ii)
There exist similarity between leases that are done economically and purchasing the
leased assets. Under former standard, in some situations the impact of classification of lease is
not reported on lessee’s balance sheet. Organizations having operating leases generated financial
liabilities but the liability impact is not presented under the balance sheet. Leasing of assets
generates liabilities in actual, however, there is no recording of the same in balance sheet. This
explains why off balance sheet liabilities were 66 time higher than debt that is reported on
balance sheet.
Requirement iii)
The financial position of airline companies is difficult to be assessed by investors
intending to make investments. There seems to be significant difference between airline
companies leasing most of its aircraft fleets and those buying most of its fleets. In actual
scenario, there might be little difference or similarity between their financial positions and in this
aspect it becomes difficult to make comparisons between such companies. Investors face
difficulties in comparing airline companies’ financial leverage.
Requirement iv)
Business adopting new lease standard will experience change in terms of internal control
and system. Recognition of lease will be done by gathering necessary data and determining
robustness of current accounting policies of organization. It is required by organization to update
their system in order to gain relevant and adequate information for enhancing disclosure
concerning leases. It becomes essential for companies to make negotiation of agreements or
loans resulting from change in financial metrics. In the initial year, profitability of business
might get reduced due to additional cost required in lieu of imposition of standard. Moreover,

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ADVANCED FINANCIAL ACCOUNTING
companies might witness default on debt covenants followed by negative economic impacts8. All
these factors make new standard adoption controversial among companies.
Requirement v)
The assessment of lease term is done by taking into consideration proper judgment as it
requires identifying circumstances and recognizing liabilities pertaining to lease in actual sense.
Assessment of lease by organization is done by considering economic factors such as whether
leases are contract based, asset based, entity based and market based. All these make
considerable improvement in conditions, terms and contracts of lease holding. It is not required
by investors to perform rough calculations and organizations are not required to maintain their
structuring of leasing off balance sheet to look attractive for investors9. Therefore, while making
investment in any entity, investors will have informed decision as they will be getting absolute
financial position.
8 Lubbe, Ilse, Goolam Modack, and Alex Watson. "Financial Accounting GAAP Principles." OUP Catalogue
(2014).
9 Wong, Karen, and Mahesh Joshi. "The impact of lease capitalisation on financial statements and key ratios:
Evidence from Australia." Australasian Accounting Business & Finance Journal 9, no. 3 (2015): 27.

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ADVANCED FINANCIAL ACCOUNTING
References list:
Ghani, Erlane K., and Kamaruzzaman Muhammad. "The Effect of Freemind on Students’
Performance in an Advanced Financial Accounting Course." International Journal of Academic
Research in Business and Social Sciences 6, no. 7 (2016): 262-275.
Gud.com.au. (2018). Annual Reports & Reviews - GUD. [online] Available
at: http://www.gud.com.au/annual-reports-reviews [Accessed 6 Jan. 2018].
Haskin, Daniel L., and Megan M. Burke. "Incorporating Sustainability Issues Into The Financial
Accounting Curriculum." American Journal of Business Education (Online) 9, no. 2 (2016): 49.
Hoskin, Robert E., Maureen R. Fizzell, and Donald C. Cherry. Financial Accounting: a user
perspective. Wiley Global Education, 2014.
Jalil, Abdul, Nor Azah Binti, and Hasnah Binti Haron. "The Association Between Prior
Knowledge and Learning Approaches, in Performance in an Advanced Accounting Course."
Advanced Science Letters 21, no. 4 (2015): 922-925.
James, Marianne L. "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, no. 3 (2016): 152.
Lubbe, Ilse, Goolam Modack, and Alex Watson. "Financial Accounting GAAP Principles." OUP
Catalogue (2014).
Wong, Karen, and Mahesh Joshi. "The impact of lease capitalisation on financial statements and
key ratios: Evidence from Australia." Australasian Accounting Business & Finance Journal 9,
no. 3 (2015): 27.

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ADVANCED FINANCIAL ACCOUNTING