Disclosures for Finance Lease

DISCLOSURES FOR FINANCE LEASE
Course
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Date

Table of Contents
Accounting Standard for Leases..................................................................................................................3
Abstract...................................................................................................................................................3
Introduction.............................................................................................................................................3
Evaluation of the AASB117..................................................................................................................4
Drawbacks...............................................................................................................................................4
The Necessity for the Change..............................................................................................................6
Changes that Have Been Incorporated in the New Accounting Standard for Lease AASB 16..............7
How Companies that have Significant level of lease Financing get Affected.......................................9
Reason companies had a Tendency to Classify Most of the Lease contract as Operating Lease.......10
How Positive Accounting Theory Relates to this Behavior of Managers............................................10
Why Companies Might Buy more Assets and Lease few...................................................................12
Commonwealth Bank of Australia 2018 Annual Report....................................................................12
The Effect of the Transition...............................................................................................................13
Conclusion.............................................................................................................................................13
Bibliography...........................................................................................................................................14

Accounting Standard for Leases
Abstract
AASB lately issued a new standard AASB 117 that will apply to all reporting entities
from January 1 2019. This new standard creates a difference in the model that is used when
recording and reporting on leases. The new changes in the leases will entail recognizing the
operating leases on the statement of financial position as either assets or liabilities and as a result,
many companies’ financial statements will be affected significantly. The effect will vary
according to the different decisions each management will undertake to address these issues.
This paper looks at the changes that are brought about by the new standard and how the
companies will react to these change. In general, it is anticipated that most companies will look
for ways to address the impact that will be brought about by the implementation of the new
standard.
Introduction
The AASB 16 which has been introduced removes the difference that existed between
finance and operating leases and it requires the recognition of the right use of assets and the
arising lease liabilities for the leased properties. This new standard was introduced as a result of
lack of transparency by reporting firms as they opted to recognize most leased assets and
liabilities inform of operating leases so that they can avoid reporting huge amount of liabilities in
their financial statements. For most reporting entities the new standard will take effect in 2019 -
2020 financial years. The new standard will ensure that there is consistency in the cash flows of
the reporting entities which will allow comparability and transparency.

Evaluation of the AASB117
AASB 177 creates a distinction between a finance lease and an operating lease.
According to this standard, the classification of an asset as either a fiancé or operating lease
depends on whether the risks and rewards associated with that kind of the leased asset lie with
the lessor or lessee. These accounting standards oblige that the lease payments under the
operating lease be recorded as an expense using the straight-line method during the lease period1.
The finance lease is recognized as either a liability or an asset the statement of financial position.
Operating leases under the old standard are not reported in the financial statements but are just
reported in the disclosures and footnotes. This standard classifies leases as either a finance or an
operating lease during the inception of the lease.
Drawbacks
AASB 117 did not obligate the lessee companies to report the assets and liabilities that
were acquired in their statement of financial position. This information was instead put in the
footnotes. As a result, it made it difficult for the users of financial information and other
investors to accurately to account for the companies’ correct amount of expenses which made
them overestimate or underestimate the financial obligations of those companies hence making
wrong judgments.
AASB 117 made it difficult for external financial users and investors to conduct
comparisons of businesses that were buying leases and those that were selling the leases. This
was due to the inability of the lessee companies to report that information in their balance sheet
which made the information inadequate for useful decision making.
1 "Accounting For Leases: Presentation And Disclosures | Insights". 2018. Bakertilly.Com.
http://www.bakertilly.com/insights/accounting-for-leases-presentation-and-disclosures