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ACCT6007 Financial Accounting Theory & Practice

   

Added on  2020-05-11

6 Pages1982 Words75 Views
Financial Accounting Theory and Practice1

IntroductionThe IASB (International Accounting Standards Board) hold the responsibility of developingaccounting standards and conventions that business entities need to follow for developing financialreports. The IASB has developed a new accounting standard of IFRS 16 for ‘leases’ that businessentities around the world need to follow for reporting their operating and finance leases on the balancesheet. The IASB has also directed AASB (Australian Accounting Standards Board) to adopt the use ofnew accounting standards for leases by developing AASB 16 that will replace previous AASB 117standards for leases from the year 2019. There has been development of exposure drafts by the FASB(Financial Accounting Standards Board) and IASB for gaining feedback from the stakeholdersregarding the proposed new accounting standard. In this context, the present essay critically discussesthe practical implications of new accounting standards has considered the fundamental characteristicsof the financial information stated in the AASB framework. This has been done through analyzing thediscussion presented in the article developed by Churynk, Reinstein and Lander (Churyk, Reinsteinand Lander, 2015).Critical Discussion of Practical Implications of New Leases Standards as per FundamentalCharacteristics of AASB FrameworkTwo fundamental characteristics of financial information stated in the AASB’s Framework forPreparation and Presentation of Financial StatementsThe AASB framework for the preparation and presentation of financial statements haspresented the conceptual framework of financial reporting used by business entities in Australia fordeveloping financial reports. The qualitative characteristics of useful financial information as stated inthe AASB framework are relevance and faithful presentation. The financial information is said to berelevant if it can make a difference in the decision-making of the users such as investors and creditor.The financial information in order to be relevant should have a predictive and confirmatory value. Thepredictive value of a financial information means that it should be able to predict the future financialgrowth of an entity (Freeman and Freeman, 2015). On the other hand, confirmatory value of thefinancial information should be able to provide feedback about an entity past and present financialresults. The faithful representation of the financial information should be able to represent theeconomic phenomena through providing complete, neutral and error-free information. The financialinformation should be able to provide complete knowledge regarding the financial phenomenathrough providing all the necessary descriptions and explanations (Framework for the Preparation andPresentation of Financial Statements, 2016).2

Impact of Compliance with the new standard for leases, i.e. AASB 16 Leases on lease accounting andreporting and business metrics by the lessee and lessor as discussed in Churyk, Reinstein and Lander(2015), i.e. practical implications The main objective of the IASB behind the development of new standards for leases is toeliminate the differences that exist between operating and finance leases and to report them on thefinancial statements through the use of similar accounting conventions. The new standards for leaseshave eliminated the difference between the operating and finance leases and have directed thebusiness entities to use only a single lessee accounting model for recognition of leases. This applies toall leases having time-period of more than 12 months (IASB issues new leasing standard, 2016). Thearticle ‘Leasing: reducing the game of hiding risk’ presented by Churyk, Reinstein and Lander hasdiscussed the implications of the FASB and IASB on leases standards. The article has presented theconcerns regarding the new leases standards that can result in increasing the complexity of recordingleasing transactions in the balance sheet. As per the article, the FASB and IASB have proposed tointroduce new lease standards for overcoming the problem of not recording many lease obligations onthe balance sheet. As such, the use of the new proposed standards can result in complete disclosure ofthe economics of the lease transactions as per the qualitative characteristic of faithful presentation offinancial information. The article has also presented the discussion regarding the use of similaraccounting methods for recording lease transactions as proposed in 2010 exposure draft in the year2012. The IASB have directed the business entities to report some lease obligations through the use ofstraight-line basis method while others through the use of amortization basis. As such, the recognitionof leases by business corporations would require the use of separate accounting conventions after theyhave been initially recorded through the use of same accounting methods. The subsequentmeasurement often develops differences that would require adjustment in the financial statementsafterwards. The standard would require significant quantitative and qualitative disclosures about thelessees and lessors in the financial statements. As such, it can be said that new leases standards oftenincreases the complexity of recording lease transactions for business entities (Churyk, Reinstein andLander, 2015). Explanation of affect of Compliance with AASB 16 requirements identified in Part (2) on thereporting of lease information that satisfies two fundamental characteristics specified in theFrameworkAs per the qualitative characteristics of relevancy and faithful representation, the new leasesstandard has increased the disclosure requirement of leases in the financial statements. The businessentities are also required to report the operating leases in the balance sheet under the new accountingstandard of AASB 16. Thus, the business entities are required to adopt proper classification criteriafor determining the type of leases and therefore causing major changes in the financial reporting3

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