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Financial Accounting Theory and Practice : Assignment

   

Added on  2020-04-29

8 Pages2185 Words140 Views
Running head: FINANCIAL ACCOUNTING THEORY AND PRACTICE Financial Accounting Theory and PracticeName of the StudentName of the UniversityAuthors NoteCourse ID

FINANCIAL ACCOUNTING THEORY AND PRACTICE1Introduction: The present study is based on the current lease standard IAS 17 which has beensurrounded by criticism for resulting in unfaithful accounting where the comparability amidthe commercial firms is not clear. With the objective of overcoming the issue, the IASB andFASB have undertaken the decision of presenting the new lease standard. As stated in theexposure draft of the new standard, the most obvious modification is that the distinction amidthe operating and finance lease will be removed which states that all the lease transactionswould be represented in the balance sheet (Warren, 2016). Such proposal has beensurrounded by criticism since it will be having consequences for companies. The objective of the current study is to understand the consequences and criticismfacing the new lease standard that would have impact on the companies making the use of theIFRS and to understand if the companies have performed any preparations. Discussion: Leasing is internationally considered as the element of source of financing and hence,lease accounting standards of highest quality is required. Presently, all the listed companiesare required to follow the rules of the accounting standards that is issued by the internationalaccounting standard board. IASB is considered as an organization whose chief purpose is tocreate a solitary set of high excellence and internationally recognized reporting standardknown as IFRS (Lim et al., 2014). When IASB and FASB together launched the project ofconvergence in 2002 a significant step was taken towards the global internationalharmonization of the accounting. IAS 17 categorizes the lease as the either operating of the finance. The alterationamong the two leases is that the business lease results an asset and a liability on the balancesheet whereas the operating lease is solitary revealed as the expenditure in the footnotes. The

FINANCIAL ACCOUNTING THEORY AND PRACTICE2finance lease might be equated to the debt financed purchased while the operating lease couldbe equated to the consistent rental contract (Cheng, 2015). The IAS 17 enables the companiesto assess the lease transactions themselves to classify the contract of lease. IASB lay down the guidelines regarding the recognition of the finance lease. But thecriteria is considered to be ambiguous and to achieve the precise organization they could beexploited. This is probable to incur with the present standard of lease as the businesses thathave inducements to categorize lease agreements as the operating instead of finance in theexposure draft (Barone et al., 2014). Therefore, by classifying lease contracts as theoperating, companies will be able to get assets while maintaining an unaffected structure ofdebt and hence make the organization seem financially sturdier. Though every companies makes the use of the leasing as the means of obtainingaccess to the assets, they kind and the amount of assets which they lease along with the termsand structure of these contracts vary considerably. For instance, a proficient services firmleases cars and business offices, utilities of the company etc. all have different characteristicsterms, regulatory frameworks, risk and economies (Collier, 2015). As an outcome of thisdifferent implications might originate for different industries at the time of adopting newlease standard. The proposed changes that has been bought in the lease accounting states thatfinancial users will be able to remain dependent on the entity’s leasing transactions.However, the changes in the lease accounting is considered to be controversial topic sincethere are probable consequences for the companies implementing IFRS (Osei, 2017). Onintroducing the new lease standard, all the lease transactions particularly the short term leaseswill result in right to use asset and the liability as well. As a consequence of this, the balancesheet of the impacted companies will increase and will offset the changes on the vital

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