Advanced Issues in Accounting - Reporting of Leases under IFRS 16 and AASB 16

Running head: ADVANCED ISSUES IN ACCOUNTING
Advanced Issues in Accounting
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ADVANCED ISSUES IN ACCOUNTING
Contents
Introduction:....................................................................................................................................2
Reason of developing new accounting standards for leases:...........................................................2
Reasons that earlier standard does not reflect the economic reality:...........................................3
Off Balance sheet liabilities were 66 times greater than the debt reported:................................3
No level playing field between some airline companies:............................................................4
The new standard would not be popular with everyone:.............................................................4
Qantas and leases recognized in annual report of Qantas:..............................................................5
Lease arrangement for the industry:............................................................................................5
Lease arrangement for the company and the lifecycle and stage of lease:..................................5
Impact due changes in reporting of leases:..................................................................................7
Conclusion:......................................................................................................................................8
References:......................................................................................................................................9

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ADVANCED ISSUES IN ACCOUNTING
Introduction:
The purpose of accounting standards issued by the national accounting standards boards
of different countries as well as that of Internal Financial Reporting Standards Board are very
much similar. The objective behind formulation of accounting standards is mainly to improve the
quality of financial reporting by the organizations. In case of Australia it is the Australian
Accounting Standards Board (AASB) that has since its inception has formulated accounting
standards (AASBs) for the entities and organizations to be followed in preparation and
presentation of financial statements.
Reason of developing new accounting standards for leases:
Earlier AASB 117 was in force to guide the entities to account for leases in the books of
accounts. However, subsequent to lot of criticism from different corners for the inability to
reflect the financial reality of leases the International Financial Reporting Standards Board under
the Chairmanship of Hans Hoogervorst has developed a new standard IFRS 16 to improve the
reporting of leases in the books of accounts of an organization with the objective of reflecting the
financial reality of leases in the books of accounts and financial statements (Jarva & Lantto
2012). Australian Accounting Standards Board has also followed on the footsteps of IFRS and
has developed a new accounting standard AASB 16 in alignment with IFRS 16 to ensure that the
Australian corporations as well as entities that are required to adhere to the Australian
Accounting standards must improve the reporting of leases in the books of accounts (Pellens,
Fülbier, Gassen, Sellhorn, Barekzai, Bonse & Hillert 2017).

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ADVANCED ISSUES IN ACCOUNTING
Reasons that earlier standard does not reflect the economic reality:
The Chairperson has a very valid reason behind his observation that IAS 17, i.e. the IFRS
that was in force prior to the issue of IFRS 16, was not capable of reflecting the economic reality
of leases. As he made it clear in his comment while speaking on the issue that entities in all
across the globe have more than 3 trillion euros worth of assets in leases. However, more than
85% of these leases are off the Balance sheets because the old IFRS allowed these entities to
classify these leases as operating lease. IAS 17 does not require the operating leases to be shown
in the Balance sheets as a result more the 85% of the leased assets were off the Balance sheets.
Thus, there is valid reason for the Chairperson of IFRS to say that the economic reality of leases
is not reflected by IAS 17 earlier (Joubert, Garvie & Parle 2017).
Off Balance sheet liabilities were 66 times greater than the debt reported:
The reason that prior to the issue of IFRS 16 the off Balance sheet lease liabilities were
66 times greater than the actual debt reported in the Balance sheet is mainly due to the non-
recognition of operating leases in the Balance sheet. As already mentioned that 85% of total
leases were classified as operating leases and earlier as per IAS 17 the operating leases were not
required to provide for any liability in the balance sheet (Fitó, Moya & Orgaz 2013). Rather IAS
allowed the operating leases as expenditures in the year of payment and only in case of non-
payment as and when operating lease payments were due that such amount used to be shown as
accrued operating leases under current liabilities. Thus, the economic reality and financial
position of an entity using significant amount of operating leases were not correctly reflected in
the financial statements due to the accounting treatments and financial disclosure requirements
under IAS for operating leases (Xu, Davidson & Cheong 2017).