Assignment - Advanced Financial Accounting

Added on - 28 May 2020

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Running head: ADVANCED FINANCIAL ACCOUNTINGAdvanced financial accountingName of the universityName of the studentAuthors note
1ADVANCED FINANCIAL ACCOUNTINGTable of ContentsIntroduction:....................................................................................................................................2Discussion:.......................................................................................................................................2Retailers facing multibillion dollar hit from proposed lease accounting changes:..........................2Answer to question a:......................................................................................................................2Answer to question b:......................................................................................................................2Answer to question c:......................................................................................................................3Answer to question d:......................................................................................................................3RBA right to doubt Lehman brother accounts:................................................................................4Answer to question a:......................................................................................................................4Answer to question b:......................................................................................................................5Answer to question c:......................................................................................................................6Answer to question d:......................................................................................................................7Conclusion:......................................................................................................................................8References lists:...............................................................................................................................9
2ADVANCED FINANCIAL ACCOUNTINGIntroduction:The report is prepared to gain knowledge regarding the given case study by answeringseveral questions attached with the same. Two cases are financial accounting in the real world3.3 and 3.5 as provided. Financial accounting case 3.3 is about RBA right to doubt Lehmanbrother accounts and financial accounting case 3.5 is about retailers facing multibillion dollar hitfrom proposed lease accounting changes. Explanation of these two cases has been done byanswering the questions related to each individual case.Discussion:Retailers facing multibillion dollar hit from proposed lease accounting changes:Answer to question a:Existing lease standard does not mandate reporting entities to disclose their operatinglease on their statement of financial position rather than they are obliged to show financing lease.Financing leases appears on balance sheet while operating leases are not. Operating lease couldbe compared to regular rent agreements and finance leases are compared to debt purchasefinance. Therefore, financing lease leads to leads to revealing of actual amount of debt thatcompanies are owing to and this might hamper the financial reputation of investors frominvestor’s viewpoint. Opting for treating lease as operating lease does not lead to reveal actualamount of debts and therefore, it is preferred by company to treat lease as operating lease ratherthan financing lease (Arrozio et al., 2016).
3ADVANCED FINANCIAL ACCOUNTINGAnswer to question b:The new lease standard will have an impact on increasing the debt structures and balancesheet of companies as the focus is on operating lease capitalization. This increase in the balancesheet could suddenly violate the existing debt covenants. It depicts that for excluding the leaseagreements, companies need to renegotiate exist debt covenants. Increased debt structure ofcompanies’ covenants has the possibility of endangering violating debt covenants. This is sobecause such increased structure will have considerable impact on calculations financialcovenants in arranging lease and other financial transactions. Shifting of operating lease into thedebt structures will increase the amount of debt of borrowers (Wong & Joshi, 2015). The creditarrangement would have ripple impact due to the implementation of this new lease standard.Answer to question c:A debt covenant that relies on floated GAAP will have its calculation based onaccounting rules in placing each time when the computation of covenant is done. On other hand,the calculation of debt covenants based on fixed GAAP is done on accounting rules using thedebt covenants in place when it was negotiated originally. Borrowers relying on fixed GAAPwill face lower risks and this is because when there is any change in accounting standard, thenborrowers will not be exposed to debt covenants violation. Borrowings that are issued at thefixed rate do not expose the consolidated entry to interest rate risk that is valued fairly. On otherhand, borrowings that are issues based on floating GAAP exposes the entity to fair value interestrate risks. Therefore, the differences between the debt covenants are likely to be attributable interms of accounting treatment and the risks to borrowers. Debt covenants under fixed GAAP arenot exposed to market risks and while that of floating GAAP are exposed to market risks(Beckman, 2016).
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