IFRS 16 Lease Accounting Impact

The assignment examines the effects of implementing IFRS 16, a new standard for lease accounting. It discusses how this standard enhances financial reporting by requiring leased assets and liabilities to be recorded on the balance sheet. The document argues that IFRS 16 promotes transparency, improves capital allocation decisions, and fosters greater awareness of leasing practices within companies. Furthermore, it addresses the elimination of the current dual accounting model under IFRS 16 and its contribution to a clearer distinction between on-balance sheet and off-balance sheet operating leases.

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)
From the analysis of annual report of Crane Group limited, it can be seen that goodwill
has been subjected to an impairment test on annual basis and they are tested whenever there is an
indication resulting from events and circumstances that it requires impairment. Any excess
amount of goodwill should be written off in the period of determination. Over the useful life of
assets, amortizations of intangible assets are done. If change in status of impairment is indicated
by occurrence of any events and circumstances, then impairment testing is conducted by
organization more often than annually. Crane group limited also conducts impairment testing
annually for intangible assets with indefinite useful lives and the potential for impairment is
indicated by circumstances and events. Moreover, reviewing of definite lived intangible assets
are reviewed for impairment when there is indication that particular assets requires impairment.
During the fourth year, annual impairment testing is performed by company. Company has
reviewed long-lived assets when it is indicated that particular assets carrying value cannot be
recovered as depicted by circumstances and events (Cranegroup.com 2018).
Requirement ii)
The assessment of annual impairment is performed by organization by comparing
respective carrying value of assets with their fair value of reporting units. When the estimated net
book value of reporting unit is more than fair value is less than, goodwill is regarded to be
potentially impaired. Establishment of fair value is done by discounting future estimated cash
flow at an estimated cost of capital. In the recent impairment assessment, cost of capital
considered for estimating future cash flow varied from 9% to 12%. Furthermore, organization

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has applied hypothetical and reasonably possible 10% decrease in fair value for evaluating the
sensitivity of calculations of fair value on the impairment testing of goodwill.
Requirement iii)
Crane group limited did not require impairment charges during financial year 2016, 2015
and 2014.
Requirement iv)
Organization is required to make assumptions and estimates in light of certain
accounting policies adopted and this have an impact on reported amount of liabilities and assets.
Assumptions involved some inherent uncertainties such as judgment of management in applying
the analysis of goodwill impairment. Reasonable assumptions and estimates are made by
organization for calculating fair value of reporting units. Anticipated net increase or decrease in
costs and current structure of costs forms the basis of assumption of profit margin
(Cranegroup.com 2018). There is periodical reviewing of assumptions and estimates and the
impact of revisions are reflected in the financial statements.

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Requirement v)
Impairment testing of organization has the possibility of getting impacted by subjectivity
and extent of estimates and involvement of subjectivity in the impairment process has the
possibility of creating difficulties in obtaining accurate inputs. Presence of higher degree of
subjectivity makes the measurement of amount to be recovered is highly sensitive that lead to
assumptions that cannot be verified about terminal growth rate. Methodology of impairment
testing would be gamed by recoverable amount manipulation and it will have the consequence of
manipulating recognition timing. The outcome of impairment testing is influenced by presence
of high degree of subjectivity, as the management would act opportunistically (Cascino et al.
2016).
From the analysis of annual report of Crane group limited, it can be ascertained that there
exist low degree of subjectivity used in the impairment testing assumptions. The purpose of
impairment testing involves goodwill allocation to cash generating units and in the event of
occurrence of restructuring, goodwill is reallocated. However, management is making estimates
and assumptions in determining the discount rate and cash flows and this would cause substantial
fluctuations in values generated. Furthermore, impairment status of organization is dependent
upon circumstances and economic events that create the requirement for impairment. Crane
group management have made assumptions about forward looking statements depending upon
future events that might not be accurate (Cranegroup.com 2018).
Requirement vi)
The impairment testing of Crane group limited is surprising as depicted from the analysis
of annual report of company. It was so because the information about impairment testing is not
presented in detailed way and there are no technical procedures in conducting impairment

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testing. Annual report of Crane group depicted that it adopted hypothetical changes in fair value
of each reporting unit and the sensitivity of fair value is evaluated by carrying out sensitivity
analysis. Assessment of impairment requires making estimates of valuation of assets and other
items (Mayo 2017).
Requirement vii)
After the analysis of annual report of Crane group limited, it was ascertained that
impairment testing of assets is done by organization not necessarily on annual basis. Impairment
testing can be conducted when there is an indication of carrying out impairment as depicted by
some circumstances and occurrences of some events. Unlike some other similar companies,
annual impairment testing is performed by company during fourth quarter. Impairment
assessment conducted by company more recently ranges between 9% to 12% and the inherent
risk of each reporting unit is tested (Cranegroup.com 2018). Judgment of management in
applying in applying to the analysis of impairment of goodwill also comes with inherent
uncertainties. Moreover, long-lived assets are reviewed for impairment when the amount is not
recoverable. Therefore, the surprising insights that have been gained after evaluating the annual
report of company is that impairment is carried out on annual as well as quarterly basis if
indicated by events and circumstances.
Requirement viii)
The fair value of reporting units to which goodwill is attributed and assigned are
evaluated as per the provisions of accounting policies employed by company. Determination of
existence of impairment is performed by comparing the carrying value to fair value.
Establishment of fair value of reporting unit is done by discounting estimated future cash flow at
cost of capital that varies and by making reasonable assumptions. It is believed by company that

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there do not exist any events and occurrence that has the impact of reducing the fair value of
definite and infinite lives of intangible assets. Marking of financial instruments contracts are
done on current basis and realizing the loss or gains that are recognized in other expenses or
income. Any changes in derivatives fair value have their recognition in the comprehensive
income statement (Cranegroup.com 2018).
Assessment Task Part B:
Requirement i)
A clear picture of financial position of reporting entity is not provided under the existing
lease standard, as there is application of different accounting models for different transactions.
Actual amount of liabilities of business might be more than what is represented in the balance

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sheet under existing standard. The current accounting for lease do no requires operating lease to
be disclosed on the balance sheet and hence many leased liabilities and assets are not represented
on the financial statements of reporting entity. It has been estimated by IASB that out of US $
3.3 million worth of lease commitments all over the world, 85% of it does not appear on the
balance sheet (James 2016). Hence, financial analysts and investors seeking information from
balance sheets will not be provided with appropriate information and they do not reflect true
figures. The lack of proper information about financial obligations and it absence on balance
sheet will lead to understatement of liabilities. It is so because organizations having thousand
worth of assets under the commitment of operating leases is not incorporated in the financial
metrics. Actual financial position of company in terms of its several financial metrics is not
depicted by the new standard (Horton 2018). Based on the information available on the balance
sheets, investors make adjustments and thereby it does not reflect true economic reality.
Requirement ii)
Former accounting standard does not make it mandatory to make presentation of
operating lease on balance sheets and does not record the associated liabilities. Various financial
metrics of organization such as outstanding liabilities, EBIT, net income and operating cash
flows does not reflect their actual value because of absence of lease commitments on balance
sheet. Organizations make lease accounting on balance sheets virtually and both operating and
financing leases are not disclosed in the balance sheets (Choubey 2016). This would make total
assets and liabilities arising from lease commitments to be accounted for by organization and
they are not presented on balance sheet. However, companies reflect total amount of debts that is
attributable which would be considerably lower than total leased assets and liabilities. It is the

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reason why the off balance sheets liabilities is more than the total amount of debt presented on
balance sheets.
Requirement iii)
The controversies associated with former accounting standard concerning lease is related
to the complications of creating difference between financing and operating leases. Operating
leases are more required to make disclosure on their balance sheet and this is the reason airline
companies was no level playing field. Most of airline companies carry out their operations by
buying their aircraft fleets and some other lease fleets (Hoyle et al. 2015). This is indicative of
the fact that there exists considerable difference between financial positions of such airline
companies. While, it is possible that such companies financial positions are identical. Airline
companies incorporating different characteristics such as economics, pricing and risks lease
Aircrafts and this is the reason there is no level playing field between such airline companies.
Requirement iv)
Standard implementation is regarded as lengthy process and for controlling to track and
account for leases require developing new process. Management is required to aggregate and
collect necessary information needed for disclosures. Allocation and identification of no lease
and lease components are also required. There would be fundamental change in accounting
treatment of leases by lessee and assessment method of lease liabilities would change. Since
there will be increased reported liabilities and assets as most of leases would be brought on to
balance sheets. Moreover, there is no distinction between leases that are on balance sheet and off
balance sheet operating leases under IFRS 16. This leads to introduction of single on balance
sheet accounting model that is identical to current finance lease accounting. Some other reasons
responsible for making new accounting standard for lease unpopular is increased complexities

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and costs in reporting (Plotnikov et al. 2017). It has been perceived that many reporting entities
would fail covenant testing if there new lease standard becomes effective and for the lessee,
organization will appear more leveraged that they are in actual terms (Hoskin et al. 2016).
Organization is required to review their current leasing activities for implementation of standard
and it will be time consuming for them to collect and gather data.
Requirement v)
New accounting requirements concerning leases brought by the implementation of new
leasing standard would end the guesswork and rough estimates made by investors when
computing the substantial lease obligations of company. There would be much needed
transparency as there will be proper disclosure of lease liabilities and assets and this is indicative
of the fact that there will be no longer lurking of off balance sheet lease financing (Warren
2016). Moreover, new standard will help in facilitating comparison between those that borrow
for buying and those that leases. Organizations are required to make disclosure of their leasing
commitments and hence there will be more transparency for liabilities that are disclosed in the
balance sheet. Disclosure of leased liabilities and assets will help in brining a more flexible
source of finance and expenditure related to capital (Cheng 2015). There will be better
allocation of capital, better decisions by management and creating a new awareness about the
method of leasing done by company. Furthermore, the model of current dual accounting will be
eliminated by the implementation of this standard and it will help in creating distinction between
off balance sheet and on balance sheet operating leases.

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References list:
Cascino, S., Clatworthy, M., Osma, B.G., Gassen, J., Imam, S. and Jeanjean, T., 2016. The
decision usefulness of financial accounting information: an experimental interview study of
institutional investors
Cheng, J., 2015. Small and Medium Sized Entities Management’s Perspective on Principles-
Based Accounting Standards on Lease Accounting.
Choubey, S., 2016. IFRS 16 Leases. The MA Journal, 51(2), pp.91-94.
Commerce, P., 2014. Advanced Financial Accounting.
Cranegroup.com. (2018). Crane Group. [online] Available at: http://cranegroup.com/ [Accessed
17 Jan. 2018].
Crawley, M. and Wahlen, J., 2014. Analytics in empirical/archival financial accounting research.
Business Horizons, 57(5), pp.583-593.
Horton, J., 2018. Advanced Financial Accounting and Reporting: Theory, Practice and Evidence.
Routledge.
Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective.
Wiley Global Education.

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Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
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.
Johnson, K., 2014. Lease accounting: a look into the proposed standard.
Matherly, M., 2015. ACCT 305-01-02 Financial Accounting & Reporting I.
Mayo, W., 2017. GAAP: An Analytical Study of Financial Accounting Standards (Doctoral
dissertation, University of Mississippi).
Plotnikov, V.S., Plotnikova, O.V. and Mel’nikov, V.I., 2017. O teoreticheskikh aspektakh
Mezhdunarodnogo standarta MSFO (IFRS) 16 «Arenda»[On the theoretical aspects of the
International Standard IFRS 16 “Lease”]. Mezhdunarodnyi bukhgalterskii uchet—International
accounting, (1), pp.2-15.
Warren, C.M., 2016. The impact of International Accounting Standards Board
(IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3).
Киселева, Е.А. and Юрасова, И.О., 2015. InteractIon and dIfferences In management and
fInancIal accountIng. Высшая школа, (6), pp.9-14.