Lease Standard

The report analyzes the impact of the new lease standard on financial reporting and external users. It examines the implications of the new standard on financial statements of reporting entities and financial ratios. The research questions guiding the exploration in the research area have been addressed by analyzing the findings generated from the chosen research papers. The paper has also explained the research questions with the help of accounting theories.

Running head: LEASE STANDARD
Corporate and financial accounting
Name of the Student:
Name of the University:
Author’s Note:

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Executive summary:
The report has been prepared for conducting an analysis of the research papers relating to the
financial and accounting reporting. For the analysis purpose, the topic that has been selected is
lease and the implications of the new standard on external users of the financial report. Report
also outlines the research questions that have been addressed in the discussed research papers.
Eight journal articles have been chosen that gives an explanation of the current lease standard
and the proposed lease standard and its impact on the reporting entities. Later section of the
report also accounts for the description of accounting theories in relation to the research
questions that have been outlined in the paper. The research questions have been addressed by
analyzing the findings generated from the chosen research papers.

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Table of Contents
Introduction:....................................................................................................................................3
Identification of research area:........................................................................................................3
Research questions guiding exploration in the research area:.........................................................3
Information generated from analysis of selected research paper:...................................................3
Research findings in relation to research questions:........................................................................3
Explanation of research questions with the help of accounting theories.........................................3
Conclusion:......................................................................................................................................3

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Introduction:
The current paper elucidates the discussion on the subject associated with accounting and
financial reporting while focusing and confining explanation to the topic “lease”. For this
purpose, some academic journals articles have been selected that helps in conducting an
investigation into the accounting standard that impacts the accounting and classification of lease.
The current accounting standard and the upcoming accounting standard that will be effective
later relating to lease treatment have been studies for critically analyzing the impacts of such
standard on the users and financial reporting of entities.
Identification of research area and its importance:
The accounting topic concerning lease has received considerable amount of attention
seeking an extensive research because the way lease are reported in the financial statements and
accounted for is significantly influenced by the introduction of new lease standard. There has
been debate and examination of accounting for corporate lease for more than thirty years. The
modification of financial reporting concerning lease has been developed IASB (International
accounting standard board) and FASB (Financial accounting standard board). The existing
literature has been analyzed and examined for anticipating the possible effects of such changes in
light of the proposals being made (Liviu-Alexandru 2018). The existing studies have been
reviewed for ascertaining the reasons behind the engagement of firms in operating lease and how
the users are impacted by such arrangements. Furthermore, it is important to highlight the
literature relating to the proposed changes that will be brought about by the introduction of new

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standard and its economic implications for the users and preparers of financial report. The reason
behind conducting research on the lease standard is to perform a comparative analysis of the
current and the proposed lease standard and identify any accounting challenges that will be put
forth when accounting for lease. The distinction between operating and financial lease has been
removed and requires reporting of all the leased assets and liabilities on the balance sheet (Kabir
and Rahman 2018). It is essential for the reporting entities to account for the changes that will be
introduced due to the implementation of new lease standard.
Research questions guiding exploration in the research area:
The identified research topic have been analyzed and examined by exploring several
research questions that are listed below:
 Does the implementation of new lease standard will make the financial reporting process
more complex?
 What are the implications of the new lease standard on the external users of financial
report?
 Will the financial statements of reporting entities be adversely impacted by the
implementation of new rules for reporting lease?
 How different financial ratios such as profitability ratios, solvency ratios and efficiency
ratios are impacted by the new rules set for lease accounting?
Information generated from analysis of selected research paper:
In this section, analysis of the chosen articles concerning research interest area has been
discussed.

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The article titled “The impact of lease capitalization on the financial statements and key
ratios with evident from Australia” provides information on the rules relating to proposed lease
accounting and how the financial ratios and financial statements are impacted by it. This
particular research topic is considered relevant because it helps in gaining insight into the impact
of such standard on the financial position of firms. It has been founded in the study that the
income statement and balance sheet of reported members will be materially impacted by lease
capitalization that will lead to considerable change in leverage and return ratios. There would be
significant changes in the financial statements due to capitalization of leased assets and
liabilities. Findings generated from the study have practical implications for accounting
practitioners and corporate managers that would help in lessening the impact of such standard by
formulation and planning of strategies (Kabir and Rahman 2018).
Another article titled” accounting implications for lease classification in acquiring
transportation assets” intends to conduct a study on the lease classification under the current
standard”. The accounting implications for classification of lease are investigated in the article.
The difference in the consequences of financial accounting is the main focus of author in the
given article. The classification of lease as operating rather than financial is due to the managers’
strong incentive due to different treatment leading to financial consequences. It is also outlined
in the article that financial statements preparers have to be trained for professional judgment in
classification of lease. Moreover, it also focuses on the misclassification of lease under the new
standard and submitting that the lease classification complying with the Australian standard will
also complies with the International standard. The accountant’s responsibility towards
stewardship is performed faithfully by performing ethical behavior and professional judgment
quality (de Albuquerque et al. 2017).

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The journal article titled “the relation between operating leases and accounting
information in debt covenants” analyzes the impacts of the new lease standard on the debt
covenants of firms by examining the accounting ratios in debt covenants of firms in low and high
off balance sheet lease industries. There will be substantial change in operating lease accounting
resulting from proposed change in the lease accounting standard brought by the international
accounting standard. It is evident from the results based on debt contracts of sample firms that
for designing the debt covenants relating to borrowers in low off balance sheet lease industries
focus on the ratios of income statement and balance sheet (Czajor and Michalak 2017).
Furthermore, it is also indicated by the evidence that the use of accounting information by
lenders in covenants is influenced by operating lease that are off balance sheet. This suggests the
fact that when structuring the agreements regarding debt, the impact of off balance sheet is
considered by creditors.
The article titled “How will the new accounting standards for lease impact financial
reporting” outlines the impact of new standard on the financial reporting process and year ending
balance sheet. Many industries have taken the advantage of classification of lease as operating
lease and their balance sheet not reflecting the amount of leased assets and leased liabilities. The
balance sheet of most companies will be significantly impacted by the lease standard. It has been
found that the companies should be prepared for the implementation of new standard on lease
and should start thinking about the changes on immediate basis. Adapting to the new guidance
for lease would represent significant undertaking by the reporting entities depending upon the
industry in which operation is done by company. Therefore, instead of starting point to address
the new standards of lease, any inventory of existing lease agreements should be taken by the
company.

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The journal article titled “operating lease capitalization- Reasons and its impact on
WIG80 and WIG30 companies” attempts to conduct the assessment of potential impact of
capitalization of operating lease on the ratios of polish companies sand selected financial metrics.
It is evident from the results of empirical study that the financial ratios of sample companies are
moderately impacted by the operating lease capitalization. The literature has debated since many
years over the consequences and methods of capitalization of operating lease (Wong and Joshi
2015). Now a day, this issue seems to be more prominent and important due to changes of
regulations of accounting. Recognition of operating lease of the balance sheet will help investors
and users of financial report in decision making.
The article titled “If leases are not capitalized: The effect of qualified audit opinion on
investor’s decision and judgment” conducts an evaluation of capitalization of most of the leases
onto the balance sheet. It has been found that the qualified audit opinion on the financial
statements will be issued by auditor if there is no capitalization and misclassification of leases. It
is revealed by the result of the study that willingness of investors to invest in any client decreases
by issuing qualified opinion. It is indicated that investors are provided with informative value by
the qualified opinion resulting from misclassification of assets. The motivation of the study is
driven by the audit quality information concerning lease misclassification (Osei 2017). However,
there are several limitations to the study as the focus is mainly on non professional investors
instead of professional investors.
The journal article titled “Implications of new accounting standard for leases with the
inclusion of operating lease on balance sheet” conducts an examination of the new lease standard
on the financial ratios of aviation sector and telecommunication. The reason for selecting the
companies from the telecommunication and aviation sector is because of the importance of

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leases in such sector (Paik et al. 2015). For the purpose of analysis, data was extracted for the
year 2016 and 2015 from their published annual report. There was change in the computation of
key financial ratios that is impacted by the change and bringing of leased items onto the balance
sheet. It has been found from the analysis that the inclusion of operating lease on balance sheet
has mostly impacted the debt to equity ratios and return on assets along with influencing the
liquidity perception. The inclusion of leased items does impacts the ratios such as debt to equity
and return on total assets (Zhang 2018). In addition to this, increase in total amount of assets and
total amount of liabilities has been found to be material under the new accounting standard for
lease.
The journal article titled” implementation of IFRS 16 leases: impact of decision of
entities on financial statements” intends to assist entities in making decision by highlighting the
option on financial statements and possible options that is offered by the standard. It is supported
by the empirical evidence that the off balance sheet liabilities are considered by market
participants. It has been concluded from the study that the new lease standard implementation
impacts the financial statements of reporting entities and the significant factor influencing is
intensity of lease of each company. Arising of lease liabilities and leased liabilities lead to
increase in metrics such as earnings before interest and taxes and decrease in return on assets.
The wide use of capitalization model lowers the amount of operating expenses recorded as such
expense would be recognized as interest expense and depreciation expenses (Laidlaw and
Ljungqvist 2018). Entities in such scenario would not separate lease components and no
application of voluntary exceptions would be done.

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Research findings in relation to research questions:
Findings generated from the research papers depicts that presentation of operating lease
on the balance sheet would make the process of financial reporting more complex under the new
lease standard. It is so because the preparers of financial statements are required to perform some
complex calculations for bringing the leased items on the balance sheet. Moreover, the financial
ratios of company are considerably impacted by the implementation of new lease standard that
leads to constructive operating lease capitalization (Weaver and Woods 2015). It is difficult to
make comparison between the firms when there is ignorance of operating lease. In the absence of
capitalization of operating lease, it is problematic to make the comparison between companies
and accounting ratios relevance. The benefit of information related to operating lease in decision
making will be increased by making disclosure of life of lease portfolio and alternative cost of
borrowing (Joubert et al. 2017). In addition to this, the comparability and quality of financial
reporting of listed entities would be improved by the proposed changes brought by the lease
accounting which requires recognizing the leased liabilities and assets for leases of more than
twelve months.
Explanation of research questions with the help of accounting theories:
Leasing is defined as strategy of investment that confers a company to have the rights of
benefit from capital asset services without owning it. All the reward and risks is substantially
transferred to owners in case of finance lease, while operating lease on other hand do not
substantially transfer all the rewards and risks that is incidental to ownership. The positive
accounting theory is concerned with the actions and predicting choices relating to accounting
policies. The way firms should respond to the proposed new accounting standards is outlined in

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the approach of theory. The future choices of management on the implementation of the new
lease standard will be predicted by using hypothesis. The basic assumptions of the theory
regarding the lease standard implementation are that the firm will use such standard that will be
in its own interest (Morales and Zamora 2018). Furthermore, the risks associated with the leasing
property are intended to be minimized using such theory. Violation of debt covenants will result
into incurring cost of technical default.
Conclusion:
The current paper illustrates the critical analysis of the several research papers on the
accounting and financial matters relating to lease. Analysis of the research papers have found
that lease is an important aspect in the financial matters for many reporting entities. The
implementation of the new lease standard has been found to have considerably impacted the
financial statement of reporting entities along with the process of financial reporting. There
would be significant increase in liabilities and assets reported resulting from the reflection of
leased items on balance sheet. Consequently, this would have an impact on the ratio of liability
to assets and considerable decrease in return on assets. However, when it comes to complexity in
the process of financial reporting due to the new rules set for lease, it can be inferred that
prepares of financial statements are required to do complex calculations for bringing leased items
on the balance sheet.

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Reference list:
Bunea, Ș., 2017. ANALYSIS OF CONCEPTUAL AND TECHNICAL (IN) CONSISTENCIES
IN THE IFRS 16 “LEASES” ACCOUNTING MODEL. THE ANNALS OF THE UNIVERSITY
OF ORADEA, p.247.
Czajor, P. and Michalak, M., 2017. Operating Lease Capitalization-Reasons and its Impact on
Financial Ratios of WIG30 and sWIG80 Companies. Przedsiębiorczość i Zarządzanie, 18(1, cz.
1 Practical and Theoretical Issues in Contemporary Financial Management), pp.23-36.
de Albuquerque, F.H.F., Marcelino, M.M., Rodrigues, N.M.B. and de Almeida Cariano, A.J.R.,
2017. Accounting for lease transactions: analysis of possible lobbying in the issuing of IFRS
16. Revista de Educação e Pesquisa em Contabilidade, 11(4).
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. Journal
of New Business Ideas & Trends, 15(2).
Kabir, H. and Rahman, A., 2018. How Does the IASB Use the Conceptual Framework in
Developing IFRSs? An Examination of the Development of IFRS 16 Leases. Journal of
Financial Reporting.
Kabir, H. and Rahman, A., 2018. How Does the IASB Use the Conceptual Framework in
Developing IFRSs? An Examination of the Development of IFRS 16 Leases. Journal of
Financial Reporting.

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Laidlaw, C. and Ljungqvist, M., 2018. The Impact of Leasing Standard IFRS 16: A case study
which examines practitioner’s perception of the change in leasing standard from IAS 17 to IFRS
16.
Liviu-Alexandru, T., 2018. The Advantages that IFRS 16 Brings to the Economic
Environment. Ovidius University Annals, Economic Sciences Series, 18(1), pp.510-513.
Magli, F., Nobolo, A. and Ogliari, M., 2018. The Effects on Financial Leverage and
Performance: The IFRS 16. International Business Research, 11(8), pp.76-89.
Morales-Díaz, J. and Zamora-Ramírez, C., 2018. IFRS 16 (leases) implementation: Impact of
entities' decisions on financial statements. Aestimatio, (17), pp.60-97.
Nurunnabi, M., 2017. Auditors’ perceptions of the implementation of International Financial
Reporting Standards (IFRS) in a developing country. Journal of Accounting in Emerging
Economies, 7(1), pp.108-133.
Osei, E., 2017. THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB), AND THE
INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) SINGS SIMILAR TUNE:
COMPARING THE ACCOUNTING TREATMENT OF NEW IFRS 16 WITH THE IAS 17,
AND THE NEW FASB MODEL ON LEASES. Journal of Theoretical Accounting
Research, 13(1).
Paik, D.G.H., van der Laan Smith, J.A., Lee, B.B. and Yoon, S.W., 2015. The relation between
accounting information in debt covenants and operating leases. Accounting Horizons, 29(4),
pp.969-996.

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Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting
standards (IFRS) for small and medium-sized enterprises (SMES). Advances in
accounting, 31(1), pp.165-178.
Spencer AW, Webb TZ. Leases: A review of contemporary academic literature relating to
lessees. Accounting Horizons. 2015 Jul;29(4):997-1023.
Weaver, L. and Woods, M., 2015. The challenges faced by reporting entities on their transition
to International Financial Reporting Standards: a qualitative study. Accounting in Europe, 12(2),
pp.197-221.
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key
ratios: Evidence from Australia. Australasian Accounting, Business and Finance Journal, 9(3),
pp.27-44.
You, J., 2017. The Impact of IFRS 16 Lease on Financial Statement of Airline
Companies (Doctoral dissertation, Auckland University of Technology).
Zhang, X., 2018. If Leases are not Capitalized: The Effects of a Qualified Audit Opinion on
Investors’ Judgments and Decisions. Journal of Accounting and Finance, 18(2), pp.200-212.