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MA601 : Theory and Current Issues in Accounting

   

Added on  2019-10-31

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THEORY AND CURRENT ISSUES IN ACCOUNTING 1Theory and Current Issues in AccountingInstitution AffiliationName

THEORY AND CURRENT ISSUES IN ACCOUNTING 2IFRS 16: New accounting standard on leasesIntroductionThe IFRS issued a new standard for leases that will oblige lessees to recognize most of the leases in their statements of financial position as lease obligations with equivalent right to useassets. A lease contract is considered to be a contract between two parties, the lessor, and the lessee. According to the lease agreement, a lessor is the lawful owner of the property; the lessee acquires the right to utilize the property in return for rental fees (Warren, 2016). Under present accounting requirements, more that 85% of the leases are labelled as operating leases and they are not reported on the statement of financial position. The new lease accounting model issued by FASB in FY2016 represents one of the biggest and most important reportingadjustments to accounting policies in decades. This principle accounts for a complete overhaul of financial reporting that will basically require corporations that lease assets to realize on the balance sheet the liabilities and assets for the obligation and right formed by those particular leases (Altamuro, Johnston, Pandit, & Zhang, 2014). Under this particular rule, the lessee will be needed to recognize liabilities and assets for leases with terms of more than twelve months and also requires that both types of leases be realized on the statement of financial position. IFRS 16, stipulates that the new standard becomes effective for public business entities, non-profit making organizations and certain employee’s benefits plans beginning after December 2018 and all other businesses after December 2019. This assignment attempts to explain the reasons why the new accounting principle on leases will help replicate the economic reality. According to the introductory comments to the European Parliament in Brussels, the IASB chairperson stated that the previous accounting principle did not ponder the economic realismbecause the former accounting standard for leases required lessors and lessees to categorize their leases as either operating leases or finance leases and report for those two forms of

THEORY AND CURRENT ISSUES IN ACCOUNTING 3leases seperately (Choubey, 2016). This particular standard was basically criticized for waning to meet the requirements of analysts and investors since it did not continuously offer a realistic representation of renting transactions. Specifically, it did not necessitate lessees to distinguish liabilities and assets that rises from operating leases as they were off-balance sheet leases. Consequently, many analysts investors and adjusted the reported amounts in a lessee’s financial reports so as to reflect the liabilities and assets emanating from off-balance sheet leases, and make other significant changes (Buchman, Harris, & Liu, 2016). Conversely, because of the limited available information, the estimates made were often incorrect. Additionally, several other stakeholders did not make amendments. This aspect created unevenness and inaccuracy of statistics in the market. Therefore, the new standard will offer much-needed transparency on firms lease liabilities and assets which mean implies that off-balance sheet lease financing is no longer hanging in the shadows. The new leasing principle presents theatrical changes to the lessee’s balance sheets. Lessor accounting is basically rationalized so as to conform to certain variations in the lessee standard and the new standard for recognizing income (Shough, 2011). Regardless of being off-balance sheet, there can be no uncertainty that the operating leases basically creates real obligations because, during the economic crisis, some big retail businesses went bankrupt since they were incapable to bend to the new economic authenticity. In this case, the companies had significant enduring operating lease obligations on their stores and hitherto had a misleadingly lean statement of financial position which was the main reason why underthe previous accounting principle, reporting companies off-balance sheet obligations were up to sixty six times bigger than the reported liability on their statements of financial position (Bloomfield, Biondi, Glover, Ohlson, Wilks, & Penman, 2011). Apparently, the accounting does not actually reflect the economic reality.

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