Developments in Accounting Practices

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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DEVELOPMENTS IN ACCOUNTING PRACTICES.
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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DEVELOPMENTS IN ACCOUNTING PRACTICES.
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