Corporate Accounting | Answers to Questions

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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1CORPORATE ACCOUNTING
Table of Contents
Part A:........................................................................................................................................2
Answer to question 1:.............................................................................................................2
Answer to question 2:.............................................................................................................2
Part B:.........................................................................................................................................4
Answer to question 1:.............................................................................................................4
Answer to question 2:.............................................................................................................5
Part C:.........................................................................................................................................6
Answer to question 1:.............................................................................................................6
Answer to question 2:.............................................................................................................6
References and bibliography:.....................................................................................................8

2CORPORATE ACCOUNTING
Part A:
Answer to question 1:
As per Australian accounting standard AASB 16 and IFRS 16, Lease liabilities as
well as the leased assets are recognized in the books of accounts of the lessee initially. Later
on with the payment of periodic lease rentals, the lease liability is reduced and the right to use
assets or the leased assets is depreciated periodically. Hence, the lease liability and lease asset
both decreases periodically in the books of lessee, but the carrying amount of leased assets
decreases faster than that of the lease liability.
The leased asset is depreciated in straight line method hence, a same amount of
depreciation or amortization is charged every year, whereas, the lease liability is reduced for
payment of periodic lease rentals. Lease rentals are mainly the interest on lease amount.
Hence, the value of leased asset decreases much faster than the decrease in lease liability
(Mackey et al. 2015).
Answer to question 2:
New standards issued by the AASB on lease accounting require the recognition of
lease liability as well as assets in the financial books of accounts. All the companies are
required to follow the new standards mandatorily from 1 January 2019. Including the lease
liability in the books of accounts has an impact on the overall business value or the solvency
of the business as reported in the balance sheet of the company. The new standards on lease
accounting may make it more complex to identify and value the amount of lease liability that
needs to be reported in the balance sheet. Hence, management of the reporting entity might
seem it to be difficult for changing the existing accounting policies and treatments for leases
in the books of accounts ad to comply with the new standards (Mackey et al. 2015).

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The new accounting standards are aiming at bringing more transparency and
rationality in accounting and reporting for leases. As no initial payments are made for the
leased assets, but the assets are recognized in the books of accounts, the liability should also
be recognized in respect of that leased assets in the books of lessee. It makes a fair treatment
on both the assets and liabilities side of the balance sheet. Hence, the new accounting policies
and guidelines as suggested by the new accounting standards should be followed by the
management of reporting entities.
As the lease liabilities are recognized as a liability in the balance sheet, it will increase
the debt by a significant percentage. On the other hand, only the interest part of the lease
liability will be charged to the income statement. Hence, the earnings before interest, tax and
depreciation will be increased for the reporting entities. When the lease terms will be
renewed, the liability of the business will be increased all of a sudden. Therefore, there will
be volatility in the earnings and liabilities of the companies due to the adoption of new
accounting standards and policies for lease. The equal amount of lease liability is to be
recognized as the value of leased assets in the books of accounts. Hence, there will be an
effect in the leased assets also. With the renewal of lease terms in the books of accounts, the
value of leased assets needs to be restated again equivalent to the value of lease liability
(Joubert, Garvie and Parle 2017).

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Part B:
Answer to question 1:

5CORPORATE ACCOUNTING
Answer to question 2:

6CORPORATE ACCOUNTING
Part C:
Answer to question 1:
Financial statements are the extracts of financial performance for a period and
financial position as on a particular date of a company. Hence, financial statements include
all such facts and figures which represent or show the financial performance position of the
business. The Corporations Act requires directors to ensure that the financial statement of the
company shows the true and fair view of the financial performance and position of the
company.
Some times the management of the company tries to manipulate and misstate
information in the financial companies to show a better financial performance and a better
financial position of the business for gaining attraction and interest of the investors.
Misstatement and manipulation of facts and figures in the financial statement may lead the
stakeholders in faulty decision making (Joubert, Garvie and Parle 2017).
The term ‘True and fair view’ means that the financial statements are free from
material misstatement and manipulation of the facts and figures in the financial statement.
Hence, information should be correctly reported in the financial statement following or in
compliance with the applicable accounting standards, reporting standards and rules and
regulations. The concept of true and fair view is also well accepted and established in the
auditing of financial statements of companies. The whole process of auditing and certifying
the financial statement of the companies by the auditors depend on the concept of true and
fair view of the financial statement (Joubert, Garvie and Parle 2017).
Answer to question 2:
Accounting is the language of reporting financial performance and financial position
of the business organizations. Comparison of financial statements of various companies is

7CORPORATE ACCOUNTING
important for the investors and most of the stakeholders for a conscious and feasible decision
making. Hence, there must be uniformity in accounting and reporting of the financial
performance and financial position of the companies. With this objective, most of the
countries have established their accounting standard setting boards to formulate standards for
accounting and reporting of their indigenous companies. With the revolution in the business
world, the modern business has been expanded to international level or the organizations are
operating their business globally. Hence, at present there is a need for uniform accounting
and reporting of the financial performance and financial position of the companies globally.
Individual accounting standards for individual countries might have differences and
complexities. Therefore, there must be a single and uniform accounting and reporting
standard to meet the requirement of comparability of financial performance and position of
the companies at a global business scenario (Dagwell, Wines and Lambert 2015).

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References and bibliography:
Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of corporate
collapse, accounting failure and governance change in Australia: Early 1890s to early
2000s. Critical Perspectives on Accounting, 25(6), pp.446-468.
Dagwell, R., Wines, G. and Lambert, C., 2015. Corporate accounting in Australia. Pearson
Higher Education AU.
Fitzsimons, J., Heiner, M., McKenney, B., Sochi, K. and Kiesecker, J., 2014. Development
by design in Western Australia: overcoming offset obstacles. Land, 3(1), pp.167-187.
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The
Journal of New Business Ideas & Trends, 15(2), pp.1-11.
Mackey, B., Figgis, P., Fitzsimons, J., Irving, J. and Clarke, P., 2015. Key directions for
valuing ecosystem services and protected areas in Australia. Valuing Nature: Protected Areas
and Ecosystem Services, p.129.
Sacarin, M., 2017. IFRS 16 “Leases”–consequences on the financial statements and financial
indicators. The Audit Financiar journal, 15(145), pp.114-114.
Wilkins, T.A., 2015. Accounting for Leases Standards. Wiley Encyclopedia of Management,
pp.1-4.
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and
key ratios: Evidence from Australia. Australasian Accounting, Business and Finance
Journal, 9(3), pp.27-44.