Current Issues in Financial Reporting

Running head: CURRENT ISSUES IN FINANCIAL REPORTING
Current Issues in Financial Reporting
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1CURRENT ISSUES IN FINANCIAL REPORTING
Introduction:
The IASB has issued the IFRS 16 leases which will replace the present standard of
IAS 17 leases. IFRS 16 has eliminated the notion of operating lease for the lessees and
effectively considers all the leases as the financial leases. The outcome is that all the leases
would be identified as the liabilities in the balance sheet instead of committing the same in
the notes of the financial statements (Beuselinck et al. 2017). As per IFRS 16, a lease is only
existent provided the customer has the right of controlling the use of the recognized asset for
a time period and substantially obtain all the economic benefit from the use.
The requirements of new IFRS 16 states that all the companies should recognize
leases on the balance sheet by capitalising the leases based on the present value of payments
and representing the lease as the assets whereas the future lease payments would be identified
as the financial stability. The present will discuss the new model of lease and its impacts on
the business. The main changes and the one the present essay would examine is that the IFRS
16 will not anymore by any difference between operating and financial leases in the financial
reports of the leaseholders.
Discussion:
Presently, company’s accounts for the item of operating lease provided that majority
of the risks and rewards are not yet transferred to them. In such situation, they merely record
the rental expenditure based on straight line basis over the terms of lease and not recording
any long term assets or liabilities (Morales-Díaz and Zamora-Ramírez 2018). Such
accounting treatment would come to an end excluding the circumstances where the low value
items and short term lease falling under twelve months.
This implies that the companies would be required to include the right of use assets
and a corresponding liability based on the present value of lease payments. While for

2CURRENT ISSUES IN FINANCIAL REPORTING
majority of the companies, this implies that the significant sum of assets and liabilities which
was recorded earlier and only stated under the disclosure note of lease commitments would
presently be required to include in the financial position statements (Li, Sougiannis and Wang
2017). This would presently close the practice of substantial leased property assets being the
off-balance sheet items and now these items will be bought into the balance sheet.
The most likely results are that majority of the entities would now approach the real
estate transactions in the different manner. Earlier, it might have been reasonable to obtain
properties under the operating lease instead of taking external borrowings for financing the
assets to keeping the degree of borrowings low (Morris 2017). This would not be anymore
the case and procurement teams would most probably indulge in the prolonged discussion
regarding the leasing or purchase of new assets.
The off-balance sheet items means the assets and debts or financing activities that is
not on the balance sheet of the company. Companies use them as the picture of assets and
liabilities at any point of time (Temiz and Güleç 2017). Under the new requirements nearly
all the off-balance sheet items would abolished which increase comparability but may impact
credit ratings, borrowings costs and perception of stakeholders on the organization.
The introduction of new lease would lead to change in profit and loss statements.
Presently, all the all the rental operating leases are presented as operating expenditure based
on straight-line basis as a result the same sum is expensed every year. As per new IFRS 16,
there would be both a finance cost and depreciation (Christensen et al. 2015). Under the IAS
17, the entities were under obligation of separating the components of lease and components
of services. While the absence of diligence in carrying out this exercise might not present an
issue relating to operating lease under the IAS 17 since both the elements were considered in
the identical fashion from the perspective of accounting.