Developments in Accounting Practices

This report analyzes recent changes in accounting practices and standards, focusing on the impact of new measurement policies and the exposure draft of IAS 16. It discusses the effects of these changes on financial statements and provides comments on the proposed amendment.

Running head: DEVELOPMENTS IN ACCOUNTING PRACTICES.
Developments in Accounting Practices.
Name of the student:
Name of the university:
Author Note:

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
Executive Summary:
This report is prepared to show the deep analysis of recent changes in the accounting
practices and standards. The whole assignment is prepared in such a way that the reader can
get the idea behind the changes in accounting policies and the reason of such change. The
assignment is prepared to show the overall effect of the changes in accounting standard on
the different interested people with the analysis of new measurement policies adopted in the
standard and their implication on the upcoming reporting cycle and previous reporting cycle.
In the second section of the report, the assignment is describing the exposure draft of IAS 16
with analysis of the requirement or the new procedures to be adopted as mentioned in the
exposure draft. The comments to the exposure draft is explained in agreement and
disagreement format with relevant reasons for such agreement or disagreement.

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
Table of Contents
Answer to Question 1.................................................................................................................3
1. IFRS 16 prepares for a new lease of life:...............................................................................3
1.1 Introduction to the New IFRS 16:....................................................................................3
1.2 Scope of IFRS 16:............................................................................................................4
1.3 Effective date of change:..................................................................................................4
1.4 Effect of changes:.............................................................................................................4
1.5 Changes in the financial statement:..................................................................................5
1.6 Transition approach to amended IFRS 16:.......................................................................5
1.7 Conclusion:......................................................................................................................6
Answer to Question 2.................................................................................................................7
2. Exposure draft to IAS 16 – Property, Plant and Equipment:.................................................7
2.1 Introduction to the amendment:.......................................................................................7
2.2 Comments to the proposed amendment:..........................................................................8
2.2.1 Comment of Financial reporting standards council (FRSC):....................................8
2.2.2 Comment given China Accounting Standards Committee:......................................8
2.2.3 Comment of Financial Reporting Council:...............................................................9
2.2.4 Comment of the Institute of Chartered Accountants of India:................................11
2.3 Conclusion:....................................................................................................................12
3. References:...........................................................................................................................13
4. Appendix:.............................................................................................................................16

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
Answer to Question 1
1. IFRS 16 prepares for a new lease of life:
The international financial reporting board has changed the concept and classification
of the term “lease” effective from 1st January 2019. It has changed the whole perspective and
the treatment of leased assets in the financial statement. Previously there were two types of
lease, one is operating lease and another is financial lease but from due to newly announced
IFRS 16, the whole classification of lease has been changed. Now, there is only existence of
operating lease. Operating lease is now classified as service being provided by the person
executing lease contract or person giving assets on lease. The lessee executing operating lease
contract will be termed as service provider and operating lease will be treated as service to
the organization.
This standard will act as restriction to those people who tries to hide their liability
with the help of operating lease. In other words, companies who involved in understating
their liabilities will no longer be able to understate their liability i.e. more transparency in
financial statements. (Joubert, Garvie, & Parle, 2017).
1.1 Introduction to the New IFRS 16:
International accounting standards committee has issued the new International
Financial reporting standard 16 for smoothing the accounting treatment of Lease to maintain
uniform treatment and disclosure requirement between different interested peoples. The
objective of newly introduced IFRS is to provide mechanism to represents lease transactions
faithfully and to measure uncertain cash flows from lease contract. IFRS 16 has introduced
single lease accounting model by abolishing the concept of operating lease. A lease has to
recognize all the assets and liabilities arising due to lease contract having a life more than 12
months. The new IFRS 16 has replaced international accounting standard 17 (IAS 17),

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Standard interpretation committee 15 and 27 (SIC 15 & 27) and international financial
reporting committee standard 4 (IFRIC 4) and provides the principles for the recognition,
measurement, presentation and disclosure of lease.
1.2 Scope of IFRS 16:
The concept and scope of IFRS 16 is generally similar to the IAS 17. It includes
those contracts in which the right of use of asset is transferred to another person for a period
more than 12 months in return of consideration. This standard does not apply to the
companies engaged in the business of letting intellectual property rights, biological assets,
minerals, oil, natural gas and similar natural resources.
1.3 Effective date of change:
The new amended IFRS 16 will come into effect in the financial year commencing
from 1 January 2015 with full retrospective approach or modified retrospective approach.
1.4 Effect of changes:
The new amended standard is only related to the business of lease. Therefore, the
overall effect of the standard is mostly on the lessee and the lessor. The effect of changes in
IFRS 16 can be summarized below:
 Effect on lessee: lessee will no longer able to treat the operating lease as an item of
profit & loss account. After such changes, the lessee will have to reorganize all lease
as an item of balance sheet. This will result in changes in financial ratios like
liquidity ratio, current ratio, turnover to total assets ratio, Earning per share, credit
rating, Earning before interest and tax, and borrowing costs of the company. The
companies engaged in the leasing of heavy machinery or plant or property, will be
greatly effected by such changes in the IFRS 16. The whole items of such as assets
and liabilities is going to change accordingly. The balance sheet of the lessee will

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now state increase value and the liability side will show more debt burden on the
company. This will affect investor’s perspective regarding business in the business of
the company. (Morales & Zamora, 2018)
 Effect on Lessor: lessor will now renegotiate and restructure existing and future
lease payments with lessee. The new changes will affect significantly the accounting
process of lessor but the main effect of such changes will be mainly on the lease
terms and structure of the lease term. (Monson, 2001)
1.5 Changes in the financial statement:
With the introduction of new IFRS, the whole treatment regarding lease has been
changed. The concept of operating lease has no place in the new standard. IFRS 16 do not
differentiate the term financial lease and operating lease. In other words, operating lease and
finance lease both are same under new regime. This will lead to reduction in the borrowing
costs of the company, as the lessor will not debit the extra amount paid as interest for
operating lease in its profit & loss account but will account for the depreciation element for
such leased assets. Similarly valuation of lease liability will be affected by the IFRS 16.
Valuation of lease will now be similar to the valuation of loans based on the lease term/ loan
term by adopting present value approach with the proper discounting rate. The underlying
discounting rate should be either the company’s cost of capital or incremental cost of the
borrowing. The valuation of lease liability will be affected by the lease terms, period of lease
and the nature of lease assets. (James, 2016)
1.6 Transition approach to amended IFRS 16:
The new amended standard has a full retrospective approach or modified retrospective
approach for accounting of existing lease agreements between lessor and lessee. In full

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
retrospective approach, the lessee has to make changes regarding treatment of leased assets in
its upcoming financial statements as well as financial statements of previous years. This will
result into the restating earnings of the company with the material effect on the balance sheet
total. The company has to make changes in its earlier comparative financial statements.
In the modified retrospective approach, lessee has to apply changes in the balance
sheet from the effective date of change as prescribed in the IFRS 16. The corresponding
cumulative changes will now be shown as adjustment in the equity in the balance sheet. In it,
the lessee has to make changes in its current reporting cycle with the proper reporting of the
cumulative effect on the previous leased agreements. The lessee will now recognize previous
operating lease as a lease liability in their balance sheet. The recognition shall be based on the
present value method discounted with the incremental borrowing rate at the date of initial
application.
1.7 Conclusion:
From the above discussion, it can be concluded that the amendment in IFRS 16 will
prohibit window dressing in the financial statements by the companies to understate their
liability to attract potential investors. Above-mentioned changes will result in more
transparent disclosure of financial statement with the significant impact on the valuation
method used in determining the obligation of the lessor towards the lessee. (Man & Ciurea,
2016)

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
Answer to Question 2
2. Exposure draft to IAS 16 – Property, Plant and Equipment:
2.1 Introduction to the amendment:
The exposure enumerates treatment of sale proceeds arising due to sale of scrap and
other items produced during the process of making the property, plant and equipment ready
for use in the production process. It recommends the recognition of revenue as an item of
Profit and loss account earned during the phase of making the asset fit for use.
In IAS 16, any revenue arising from the selling or disposing items produced or scraps
generated during the period of making the assets available for use or during the testing period
of such asset should be reduced from the cost of such asset. Hence, previously if an item of
revenue, which is the result of further research and developments in the said assets, will be
deducted from the value of such assets. It is widely accepted by different accounting bodies
of the world.
The proposed amendment in IAS 16 states that any revenue which is incidental to or
is the result of any process or research making the asset available for use in the operation,
should be shown in the revenue statement as an item of revenue instead of deducting it from
the value of the said asset. In other words, this amendment prohibits organization to deduct
sales process from the cost of the assets before its intended use of operation. (Bozzolan,
Laghi and Mattei, 2016)

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
2.2 Comments to the proposed amendment:
2.2.1 Comment of Financial reporting standards council (FRSC):
The FRSC committee has made his comment in the agreement with said proposed
amendment. In the comment, the reasons of such agreement has been mentioned below:
 The said amendment is in line with the conceptual framework of financial reporting.
 The definition of income is itself includes the economic benefit arising in an
accounting period as a result of inflows from assets or any appreciation in the value of
assets or decrease of liabilities. Based on the definition of income, sales revenue
generated by disposing or selling the items produced while bringing such asset
available for use, should be recognize as an item of revenue in the profit or loss
account and should not deducted from the value of said asset.
However, the FRSC committee has pointed the difficulties, which may arise if the said
amendment will come into effect such as determining the relevant costs associated with sold
items. It is quite difficult and time taking task to allocate costs that are incidental or
incremental to such revenue generated. For this purpose, a guidance note should be provided.
The FRSC committee has also pointed the issue of when property, plant and equipment is to
be recognized as available for use. It recommends board to issue guidance note clarifying the
term “available for use” in relation to said property, plant and equipment.
2.2.2 Comment given China Accounting Standards Committee:
The China accounting standards committee is in disagreement with the proposed
amendment in IAS 16 i.e. prohibiting the deduction of sales proceeds of scraps or items
generated in the process making any asset available for use in operation. Followings are the
reasons for such disagreement has been mentioned below:

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
 Any revenue generated by selling items or scrap during the process of making the
asset available for use is the compensation towards the cost incurred during the testing
period. If the cost that is incurred in the process of making asset available for use, will
be the part of total cost of the asset then any revenue generated during such process
will be deducted from the cost of such assets.
 The nature of revenue generated during the testing and quality checking process is
different from the revenue generated during ordinary course of business by selling
outputs. The intention behind the process of testing or quality checking is to insure
the availability of the asset for use in operation and it is the part of the construction
activity but not to generate the revenue from selling such item or scrap. It is incidental
to the construction process. Therefore, the treatment of two different kinds of
proceeds in same way is not justifiable and will affect the importance of revenue
statement.
 The cost associated with the revenue earned by selling waste or scrap or inputs is
quite difficult and it can not measured properly. The depreciation cost associated with
such asset is not be allocated to the items because the provision of deprecation will
only be applicable after the said is being available for normal use. Therefore, such
revenue without proper overhead allocation may overstate the profit of the enterprise.
 The proposed amendment may result in unwanted consequences on those industries
that takes long time to make their asset ready for use. The effect of this amendment is
not only limited to the mining and extracting industries but will spread to every
industries.
2.2.3 Comment of Financial Reporting Council:
The Financial reporting council of United Kingdom is in disagreement with the
amendment in IAS-16 Property, Plant and Equipment as the allocation of overhead to that

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
item of revenue generated by selling items or scrap, is not measurable and will not provide
faithful presentation of financial statement. The main reason behind such disagreement is
listed below:
 The exposure draft itself clarify the industries on which the said amendment will be
effective namely extraction and mining industries but the effect of the said
amendment will also on those industries which takes time in testing and quality
checking of such assets.
 In profit & loss account, in case of an item of revenue which is generated in the
ordinary course of business and the cost associated with such item is properly
allocated to that product with appropriate allocation of overheads to determine the
overall profitability of that product. Whereas allocation of overhead or other costs to
the item or scrap generated in the process of making property, plant and equipment
ready for use is difficult to ascertain and this will lead to the overstating the overall
profit of the company.
 The said amendment is not in line with the provisions of IFRS 15 ‘Revenue from
contracts with customers’. It may be possible that the scrap dealer can be the customer
of the company and if so, it is unjustifiable to aggregate revenue from different
sources into one category whereas IFRS 15 requires users to disaggregate the items of
revenue into category.
 The said amendment will only be applicable to those industries engaged particularly
in the mining and extraction business. It would not be desirable as the cost, which is
to be capitalized, can only be traced with such assets and there is a diversity in the
reporting of such capitalized cost.

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
2.2.4 Comment of the Institute of Chartered Accountants of India:
The Institute of Chartered Accountants of India is not in the agreement with the amendment
regarding IAS 16 Property, Plant and Equipment. The main reasons behind such
disagreement is listed below:
 The amendment is not in accordance with the basic principles of accounting. It is
dealing in improper manner, which is not appropriate. Under IAS 23, “Borrowing
costs” the borrowing costs should be capitalized net of interest income earned from
such borrowing. Hence, the revenue generated should be deducted from the cost of
the asset instead of charging it to profit & loss account as item of revenue. By the
virtue of IAS 23, Institute of chartered accountants has tried to explain the recognition
of borrowing costs in financial statement. In IAS 23, borrowing costs are categorized
in both as a liability in an addition to the existing loan obligation and an interest
expense as a charge against profit. The treatment depends upon the use of loan fund
obtained. If the loan fund is used in the construction of an asset then such expense
should be capitalized in the value of the assets and if such loan has been used for
working capital requirement then the interest expense should be charged to profit &
loss account net of any recoveries made. In similar way, where any cost directly
attributable to such asset shall be added to the cost of such asset net of any recovery
i.e. sale of scarp or input produced during testing phase.
 Para 16 of IAS 16 states that any cost that is directly traceable to the activity of
making the asset available to use shall be capitalized in the value of asset and any
asset incurred after the recognition of the asset shall be charged to the profit & loss
account of the said company. Further, para 17 specifies the examples of directly
traceable costs. The proposed amendment is not in line with previously mentioned
Para.

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
 The testing and quality checking process is the process to check the reliability and
effectiveness of the property, plant and equipment in the production process based on
standards prescribed by the management. However, any item, which is produced
during that testing process, is not the part of the company’s commercial activities or is
not produced in the normal course of business. Therefore, treatment of the said input
or scrap generated during testing process as similar to the commercial products
manufactured during normal course of business is not justifiable. As the normal
commercial activities of the business has such cost structure which consists of
allocable overhead but the items that are produced in the testing process has not
properly linked with the identifiable overheads related to such process. Allocation of
overhead to the waste or items generated during such process of testing or quality
checking of plant, property, equipment is quite difficult task, and it will take
significant effort and time to determine the allocable overhead to such waste and
inputs. The draft itself have not provided any guidance note and neither have
explained method of measurement of the cost associated with such waste or input.
2.3 Conclusion:
From the analysis of comments and the contents of exposure draft, it can be
concluded that the inclusion of revenue generated through sale of inputs or scrap generated
during testing phase in the revenue statement of the company or doing same treatment of
such revenue similar to the revenue generated in the ordinary course of business is not
appropriate. The nature of both revenue sources is different from each other. Therefore, such
recoveries shall be reduced from the cost of such property, plant and equipment.

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DEVELOPMENTS IN ACCOUNTING PRACTICES.
3. References:
Boshoff, A. (2019). IFRS 16 prepares for a new lease of life. [online] CAANZ. Available at:
https://www.charteredaccountantsanz.com/news-and-analysis/news/ifrs-16-prepares-
for-a-new-lease-of-life [Accessed 21 Feb. 2019].
Bozzolan, S., Laghi, E., & Mattei, M. (2016). Amendments to the IAS 41 and IAS 16-
implications for accounting of bearer plants. Agricultural Economics, 62(4), 160-166.
Charteredaccountantsanz.com (2019). Retrieved from
https://www.charteredaccountantsanz.com/news-and-analysis/news/ifrs-16-prepares-
for-a-new-lease-of-life
Giner, B., & Pardo, F. (2018). The Value Relevance of Operating Lease Liabilities:
Economic Effects of IFRS 16. Australian Accounting Review, 28(4), 496-511.
Herrmann, D., Saudagaran, S. M., & Thomas, W. B. (2006, March). The quality of fair value
measures for property, plant, and equipment. In Accounting Forum (Vol. 30, No. 1,
pp. 43-59). Elsevier.
James, M. L. (2016). Accounting For Leases: A Case Exploring The Effect Of The New
Lease Accounting Standard On The Financial Statements. Journal Of The
International Academy For Case Studies, 22(3), 152-157.
Joubert, M., Garvie, L., & 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), 1-11.
Joubert, M., Garvie, L., & 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), 1-11.

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Keune, M. B., Keune, T. M., & Quick, L. A. (2017). Voluntary changes in accounting
principle: Literature review, descriptive data, and opportunities for future
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Larkin, R. F., DiTommaso, M., & Ruppel, W. (2017). Wiley Not-For-Profit GAAP 2017:
Interpretation and Application of Generally Accepted Accounting Principles. John
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Man, M., & Ciurea, M. (2016). Transparency of accounting information in achieving good
corporate governance. True view and fair value. Infinite Study.
McGregor, W. (2007). Whither fair value accounting. The Routledge companion to fair value
and financial reporting, 103-115.
Monson, D. W. (2001). The conceptual framework and accounting for leases. Accounting
Horizons, 15(3), 275-287.
Morales-Díaz, J., & Zamora-Ramírez, C. (2018). The impact of IFRS 16 on key financial
ratios: a new methodological approach. Accounting in Europe, 15(1), 105-133.
Paik, D. G. H., van der Laan Smith, J. A., Lee, B. B., & Yoon, S. W. (2015). The relation
between accounting information in debt covenants and operating leases. Accounting
Horizons, 29(4), 969-996.
Ruch, G. W., & Taylor, G. (2015). Accounting conservatism: A review of the
literature. Journal of Accounting Literature, 34, 17-38.
Sacarin, M. (2017). IFRS 16 “Leases”–consequences on the financial statements and
financial indicators. Audit Financiar, 15(145), 114-122.

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Wong, J., Wong, N., & Jeter, D. C. (2016). The economics of accounting for property
leases. Accounting Horizons, 30(2), 239-254.
Yeaton, K. (2015). A new world of revenue recognition: revenue from contracts with
customers. The CPA Journal, 85(7), 50.
Yong, K. O., Lim, C. Y., & Tan, P. (2016). Theory and practice of the proposed conceptual
framework: Evidence from the field. Advances in accounting, 35, 62-74.

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4. Appendix:

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