Financial Accounting Assignment Sample (pdf)
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Added on 2021-04-07
Financial Accounting Assignment Sample (pdf)
Added on 2021-04-07
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Financial AccountingID: 001144644 – DDP0201012IFRS 16: Why it was issued and its impact on financial reporting in practice1The University of Greenwich
Financial AccountingIntroductionIn January 2016, the International Accounting Standards Board (IASB) issued IFRS 16 - Leasesrequiring all leases to be treated as if they were finance leases. IFRS 16 was born to fill the gaps of previous rental accounting standards - IAS 07 which is not valid to help estimate future leasing payments (Tudor Liviu-Alexandru, 2018). This sets new principles for the understanding and assessment of leases that lead to changes in the value of significant indicators recorded in financial statements. (Marian SACARIN, 2017). Companies with large leases assets will be most affected by this accounting standard, especially the retail industry such as supermarkets and store chains - which typically have long tenancies on large properties. (Tim Clark, 2019). This essay will point out why IFRS was implied and its impact on Retail company’s financial statements.AnalysisWhy was IFRS 16 issued?The IAS 17 rules have been criticized for many years because of the inconsistency between thetwo types of leases accounting treatment. Under IAS 17, companies could choose to classify leases as finance or operating assets based on the nature of the lease contract (Bank street Journal 2021). This is the reason why many identical transactions of leasing could be accountedfor differently. It also can be difficult for investors to compare asset leasing firms with firms purchasing properties when leasing operations are held off the balance sheet (Erika Montinaro, 2019). On the contrary, IFRS 16 offers a single accounting model without distinguishing between finance leases and operating leases (Secinaro Silvana, Brescia Valerio, Iannaci Daniel, Chmet Federico, 2020). The record of the operating lease now are treated in the same way as finance leases. The application of the new standard will merge and blend accounting standards (IASB); thus; provide amore straightforward methodandconsistentrepresentation of recording assets (Chambers & Dooley, 2015). More sufficient information will help stakeholders easier to compare the organizations’ financial performances.Besides, when IAS 17 is in place, many operating assets were hidden from the balance sheet. “Listed companies recorded around the globe have around €3 trillion worth of leases and below current accounting requirements, over 85% of these leases are classified as operating leases and are not recorded on the financial statements” (Hoogervorst 2016). These assets are not shown in the Financial Statements and therefore the related liabilities are also considered “off-2The University of Greenwich
Financial Accountingbalance-sheet” items and discarded. This is how companies keep their leverage unclear, which in turn skews financial ratios and other key financial ratios. After IFRS 16, these doubtful liabilities will be presented clearly in the balance sheet. By capitalized all leased property and show all information about those contracts (Morales-Díaz, J. and Zamora-Ramírez, 2018), IFRS16 emphasizes the right of use use of assets and liabilities have to be evaluated by the present value of the payments on the lease contracts. The new accounting method has guaranteed a more straightforward presentation of the financial leverage and capital of the tenant, exposed the consequence of presenting and classification of the assets in a more faithful technique (Meryem Öztürka, Murat Serçemelib,2016). Stakeholders with the increasing clearness of ratioscan monitor the management of the company and consider making investment decisions more effectively (Jorgen K.B and Thor G.H, 2020)What is its impact on financial reporting in practice?IFRS 16 has a significant impact on a company's financial statements both in terms of its financial position and execution in enterprise areas.(Francesca Magli, Alberto Nobolo, Matteo Ogliari). The impacts of the new standard have on balance sheets and other indicators should be considered to understand the movement of key financial ratios after IFRS 16 is adopted. In particular, there will be a change in lease assets, financial liabilities, and a decrease in companies’ equity on balance sheets. Since the capitalization of operating leases, the right of use now is recognized as an asset with a financial liability in responding in the financial statements, which will cause a significant increase in asset and liability. The value of this recognition is the lease payments rent as stated in the contract discount to the present value. It can be seen that, following this new leasing standard, the increase in value of asset and liability will affect to company’s solvency and leverage ratio such as increase leverage ratio (total liabilities/total equity), decrease ROA and decreases ROE... (Tahtah and Roelofsen, 2016)The new lease accounting standard essentially affects not only the balance sheet of the tenants but also operating expenses. The rental expense will no longer be recognized as an operating expense for a long-term asset (O. Alipbeki, Z. Dyusenbekov, Ch. Alipbekova, A.Sterenharz, 2018). Instead, the equity depreciation of use right and the accumulation of interest on a financial liability are likely to increase the number of expenses recognized in profit or loss which would also increase EBITDA and EBIT (Samuel Luiz Dias Borges,2019). Although the new rental standard does not have much impact on net profit, more expenses will be recognized 3The University of Greenwich
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