Corporate Accounting and Reporting

This article discusses accounting for finance leases by the manufacturer or dealer lessor and impairment loss calculation in corporate accounting and reporting. It covers the requirements for lessor accounting as per AASB 117 on leases, recognition of assets held under finance lease, recognition of loss or profit arising from sales, and disclosure requirements for leasing activities. The article also includes journal entries for impairment loss calculation.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate accounting and reporting
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1CORPORATE ACCOUNTING AND REPORTING
Part A
Accounting for the finance leases by the manufacturer or the dealer lessor
Finance lease is the method of delivering the finance by the leasing company.
The company provides the asset on rent for the term agreed upon. In finance lease
substantially all the rewards and risks linked to the asset are transferred to the
lessee (Barone, Birt and Moya 2014.). AASB 16 – accounting for lease introduced
the single model for lessee and takes forward the requirement for lessor accounting
as per AASB 117 on leases. The lessor continues classifying the leases as the
finance lease or operating lease and account for these 2 types of leases separately.
The AASB further requires improved disclosure that is required to be provided by the
lessor which in turn will improve the disclosed information for risk exposure of the
lessor, particularly the risk associated with the residual value. At time of contract
inception the entity shall recognise whether the contract includes or is a lease
contract (Krische, Sanders and Smith 2013). A contract is considered as lease
contract if the contract states that right for controlling the recognised asset for the
time period is offered in exchange of consideration. For any contract that includes
lease component or any supplementary lease or non-lease component, the lessor
must assign the value in the contract.
At the date of commencement of contract the lessor is required to recognise
the assets held under finance lease under the financial statement and shall record
them as receivable at the amount of net investment in lease. The lessor must use
the implicit rate of interest for measuring the amount of net investment for lease. On
the other hand, in case of sublease if it is not possible to establish the implicit rate of
interest, discount rate may be applied for original lease for measuring the amount of

2CORPORATE ACCOUNTING AND REPORTING
net investment in case of sublease. On the other hand, at the commencement date
the dealer lessor or the manufacturer must recognise few things for each of the items
under finance lease (Schelle and Baltussen 2013). These are – (i) selling cost being
the carrying amount or cost, if different or the underlying asset reduced by the
present value of unguaranteed residual value (ii) revenue as it is the fair value of
fundamental asset or if it is lower, the PV of lease payments due to the lessor using
the market rate of the interest as the discount rate (iii) loss or profit arising from sales
as per the policy for the outright sales for which AASB 15 is applicable. A dealer
lessor or manufacturer must recognise the loss or profit from sales from the finance
lease on date of commencement irrespective of whether lessor shifts the asset
underlying as stated in AASB 15 (Wong and Joshi 2015).
Dealer lessor or manufacturer generally offers the customers with choice of
leasing or buying option. Finance lease of the asset by the dealer lessor or
manufacturer leads to loss or profit equivalent to the loss or profit arising from the
complete sale of asset at the normal price. Further, it must reflect the applicable
trade discounts or volume discounts (Rapoport 2013). Further, the dealer lessor or
manufacturer often quotes low interest rate artificially for attracting the customers.
Using such policy will lead the lessor in a position where the lessor will end up
recognising excess part of entire income from transaction at date of commencement.
Further, if low interest rate is quoted artificially the dealer lessor or manufacturer
must restrict the selling profit using the market interest rate. The dealer lessor or
manufacturer shall recognise the cost incurred for obtaining the finance lease as an
expense at the date of commencement as they are associated with earning profit.
Cost incurred by the dealer lessor or manufacturer with regard to obtain the finance

3CORPORATE ACCOUNTING AND REPORTING
lease shall be excluded from the initial cost and therefore are not included in net
investment for lease amount (Song 2016).
Lessor must recognise the finance income over the lease term on the basis of
the pattern reflecting the constant rate on periodic basis on the net investment on
lease. The lessor’s main objective is allocating the finance income over the lease
term on rational and systematic basis. The lessor is required to apply lease payment
associated with the period against gross investment for lease for reducing the
principal as well as unearned finance income (Morais 2013). If reduction is there in
projected unguaranteed residual value, the lessor is required to modify the allocation
of income over the term of lease and shall immediately recognise the amount for
reduction, if any in case of accrues amounts.
The main objective of disclosing the information with regard to lease by the
lessor in the noted in addition to the provided information in the financial statement
gives the basis for evaluating the impact of lease that have on the company’s
financial position. The lessor is required to disclose the amounts for financial lease
under the reporting period are – (i) loss or profit from sales (ii) finance income with
regard to net investment in lease (iii) income with regard to the variable lease
payments those are not included in computation of net investment in lease. The
lessor is further required to disclose the added quantitative and qualitative
information for the leasing activities required for meeting disclosure objective. These
additional requirements includes – (i) nature of leasing activities of the lessor and (ii)
the way in which the lessor manages the risk related to any rights it have with regard
to the underlying assets. Particularly, the lessor must disclose the strategy for risk
management with regard to the rights it have for the underlying assets (Svoboda and
Bohušová 2014). It includes the way in which the lessor minimizes the risk. Further,

4CORPORATE ACCOUNTING AND REPORTING
these means include guarantees for residual value, variable lease payments for
using exceeding the specified limits or buy back agreements.

5CORPORATE ACCOUNTING AND REPORTING
Part B
Impairment Loss calculation
Journal entries

6CORPORATE ACCOUNTING AND REPORTING
[Note – Inventories are not taken into consideration as it is valued at the cost
or the market value whichever is less.]

7CORPORATE ACCOUNTING AND REPORTING
Reference
Barone, E., Birt, J. and Moya, S., 2014. Lease accounting: A review of recent
literature. Accounting in Europe, 11(1), pp.35-54.
Krische, S.D., Sanders, P.R. and Smith, S.D., 2013. Management credibility and
investment risk: An experimental investigation of lease accounting
alternatives. Behavioral Research in Accounting, 26(1), pp.109-130.
Morais, A.I., 2013. Why companies choose to lease instead of buy? Insights from
academic literature. Academia Revista Latinoamericana de Administración, 26(3),
pp.432-446.
Rapoport, M., 2013. Lease accounting may shift—Companies might have to
increase amount of debt they report under change. Wall Street Journal, (May 17),
p.C2.
Schelle, T.G.F. and Baltussen, S., 2013. IFRS lease accounting impact on Corporate
Real Estate Management. Eindhoven: masterthesis aan de faculteit Bouwkunde van
de Technische Universiteit Eindhoven.
Song, X., 2016. Changes in lease financing practice during lease accounting
standard overhaul (2005-2014). American Journal of Finance and Accounting, 4(3-
4), pp.309-326.
Svoboda, P. and Bohušová, H., 2014, June. The Uncertainty Associated with the
Estimated Lease Term and its Impact on the Financial Analysis Ratios.
In Proceedings of the 11th International Scientific Conference on European financial
systems (pp. 621-628).

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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.