BE130 Current Issues in Financial Reporting
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Added on 2019-10-31
BE130 Current Issues in Financial Reporting
Added on 2019-10-31
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Current Issues in Financial Reporting1.IFRS Regulation on Lease of EquipmentCurrent SituationUnder the current rules, all right-of-use assets are classified same as other non-financialassets and are detailed in the Balance Sheet under Property, Plant and Equipment. Thelease liabilities are also treated as other financial liabilities. This allows the lessee to chargedepreciation of a right-of-use asset as a deductible expense along with the interest paid onthe lease liability. Moreover, as stipulated under IAS 7, the lessee bifurcates the paymentand shows it as Principal and Interest Payment in the annual statement of cash flows,assert Ault, Arnold & Gest, (2010).Although the lessee should treat a lease asset as a right-to-use asset, the system has notbeen effective in checking this and lessee entities are measuring all lease assets andliabilities on the present value basis, similar to Property, Plant and Equipment. Themeasurement does not take into consideration the optional lease periods, nor does itexplain the options of extending or terminating the lease. In nearly all such cases, theinitial value of the lease asset equals the value of lease liability shown in Balance Sheet, asper Wilmot, (2012).New IFRS Operating Lease RulesThe new IFRS rules suggest a fundamental shift in recognizing lease assets and liabilitiesthrough implementation of IFRS 16, which state that a lessee, who has leasing assets,should show such assets and liabilities under a separate head in the Balance Sheet. Changes on the Company’s Balance SheetIFRS 16 will eliminate the current classification of operating leases or finance leases forthe lessee. Instead, the lessee will treat all leases as Finance Leases after applying IAS 17.Leases shall be ‘capitalised’ and shall be shown, either separately as Lease Assets or withProperty, Plant and Equipment, details Hanks, (2007).IFRS 16 and Company’s Income StatementThe lessee shall no longer classify its leases either as operating or finance leases. IFRS 16,which replaces IAS 17 from 1 January 2019, will have the following two provisions:1.Existing Finance Leases: These shall continue to be listed as Finance Leases.
2.Existing Operating Leases: These shall have the option to opt for a full or limitedrestatement as per the requirements of IFRS 16.ExemptionsLessee using IFRS 16 will not be required to recognise those assets and liabilities whichare (a) short-term leasesof 12months or less and (b) leases of low-value assets, such as apersonal computer.Effect on Marvin Co. Ltd.The case study of Marvin Co. Ltd. is for the year ended 31 December 2016. Since thetransition from the current system to implementing IFRS 16 shall come into force from 1January 2019, the management is not obliged to use the new guidelines for finalising thisBalance Sheet. An analysis of the situation for the current Balance Sheet of Marvin Co.Ltd. has been provided in Appendix – A at the end of this paper.2.IAS 37: Provisions & Contingent LiabilitiesObjective of IAS 37Currently used Standard IAS 37 has set the criteria for recognising and measuring:A.ProvisionsProvisionrefers to liabilities which are of uncertain timing or amount. Use ofuncertainhereis of importance because in cases where time and amount become certain, then thepayment is not considered as a provision but is referred to either as payable or accrual.B.Contingent LiabilitiesAcontingent liabilityis either a possible obligationwhich arises from a past event andneeds to be confirmed by a future event or is a present obligation, arising from a pastevent, but either:the outflow of certain economic benefits for satisfying thisobligation isnot probableorthe amount of the obligation cannot be reliably measured, saysMarsden,(2010).OverviewWith the introduction of IFRS 15 – Revenue from Contracts with Customers, most of theRetail and Consumer Product entities may have to change certain aspects of theiraccounting principles for revenue, as described by Nethercott, Devos & Richardson,
(2010). This new revenue recognition standard, which is being implemented jointly by theInternational Accounting Standards Board (the IASB) and the Financial AccountingStandards Board (the FASB) is proposing to supersede all previous revenue recognitionguidelines under IFRS.The standard, which shall come into effect for the annual reporting periods starting on orafter 1 January 2017 is also allowing an early adoption. IFRS 15 shall be dealing with allrevenue which arises from contracts with customers and shall affect all those entities whichenter into contracts for providing goods or services to their customers, says Renton, (2012)IFRS 15 shall be used for all transactions which are common in the retail and consumerproducts sector, including those controlled by licences and franchise arrangements andwhich deal with sale of goods which come with right-to-return. Options granted tocustomers include Material Returns or Consideration Payment and these are some of theareas which may be covered under the new rule. It is in the interest of the entities dealingin consumer goods, which have substantial amounts tied to Warranties should start theirpreliminary assessment of the affects as early as possible, so that the management and theaccounts teams can prepare towards implementation of IFRS 15,explain Deutsch et al,(2011). Effect on Marvin Co. Ltd.Although the impact, both financial and administrative, will vary from entity to entity, it isin the best interest of Marvin to start an evaluation of the requirements needed forimplementing IFRS 15. Although the case study of Marvin Co. Ltd. is for the year ended31 December 2016 and IFRS 15 is to come into force from 1 January 2017, the boards areallowing an early implementation. An analysis of the situation for the current BalanceSheet of Marvin Co. Ltd. has been provided in Appendix – A at the end of this paper.3.IAS 16: Revaluation SurplusRevaluation of Fixed AssetsArevaluationof the fixedassetsis such an action which needs to be carried out accurately,so as to give in detail the true value of the capital assets owned by a business. This needs tobe distinguished from the planned depreciation process in which the recorded decline in
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