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Finance lease Assignment PDF

   

Added on  2021-06-15

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DISCLOSURES FOR FINANCE LEASE Course Name Course Date
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IntroductionThere has been an increasing need for big corporations to improve their modes of disclosure and reporting of lease transactions in the recent past. This has been necessitated by thefact that leasing is becoming an important solution of financing for many multinational companies a situation which has seen its wide use. Leasing usually enables a company to make use of the property and equipment being leased without having to incur substantially large cash outflows to access them. The flexibility and the benefits of a lease in terms of providing a cover for obsolesce give the lessee the chance of evading residual value risks that are associated with buying of properties that require a huge cash outflow to acquire. Since leasing is the only way of obtaining the physical use of an asset without having to purchase it, it has become the widely preferred mode of financing among big corporations in Australia. This paper seeks to explain disclosure issues of finance lease in accounting, investigate why leasing disclosure has been changed in Australia and identify the effects of the new AASB standards on an Australian company's financial statements while identifying the importance and implications brought about by the new guidelines on disclosure of finance leases.From a contemporary definition, a lease is a contract where one party who is the leaser, conveys his or her own property in form of either land, machine or equipment and other services to another party called the leaser, for use for a certain time frame usually specified in the lease covenant and in return payment of a specified amount1. There are basically two types of leases inaccounting, an operating lease and a finance lease. A finance lease is a leasing contract where thelessor avails the leased property to the lessee who is required to pay rent for an agreed period of time while carrying all the risks attached to the ownership of the asset. Ideally, a finance lease 1 "Accounting For Leases: Presentation And Disclosures | Insights". 2018.Bakertilly.Com. http://www.bakertilly.com/insights/accounting-for-leases-presentation-and-disclosures
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usually allows the owner of the property(leaser) to transfer substantially all the risks attached to the property to the lessee. However, the definition of a finance lease and operating leases have been countered recently by the news standards set by AASB in February 20162. According to theAustralian Accounting Standards Board(AASB), the new definition of a lease is any leasing contract that enables the lessee to have absolute control of the property under lease for a certain specific period of time and also having the opportunity to obtain substantial economic benefits from the use of the same property3. The new AASB 16 standards formulated in 2016 aims at bringing an overall when it comes to the disclosure of lease transactions among companies in Australia. Beginning the financial period 1st January 2019, many Australian entities will have to abide as per the new regulations outlined by the Australian Accounting Standards Board4. A close look at the regulations set by AASB 16 shows that the classification of the operating and finance lease is likely to be scrapped so that all leases are going to be accounted for together in the statement of financial position (balance sheet) as assets and liabilities5. In my view, I believe this initiative is going to reduce the confusion that has always been there regarding the classification, disclosure and reporting of finance and operating leases in the financial statements. The implications for the new standards is that companies will no longer have to classify leases as finance or operating leases but will have to classify all the leases including its 2 "Australian Accounting Standard AASB 16 Leases | Regulation Impact Statement Updates". 2018.Ris.Pmc.Gov.Au. https://ris.pmc.gov.au/2016/04/19/australian-accounting-standard-aasb-16-leases.3 "Accounting Standards". 2018.Aasb.Gov.Au. http://www.aasb.gov.au/Pronouncements/Current-standards.aspx.4 Knubley, Rachel. 2010. "Proposed Changes To Lease Accounting".Journal Of Property Investment & Finance28 (5): 322-327. doi:10.1108/14635781011069936.5 Mills, Jones. 2017. "Thoughts On The Impact Of Changes To AASB 16?".Intelligent Investor. https://www.intelligentinvestor.com.au/thoughts-on-the-impact-of-changes-to-aasb-16-1878181.
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