Holmes Institute HI6025 Accounting for Lease: Critical Review Report

This report critically examines the Australian accounting standard for lease financing, AASB 16. It explores the effects of changes in accounting standards on companies with significant lease financing, including impacts on financial position, performance, and operations. The report delves into the classification of leases, particularly operating leases, and the reasons behind their prevalence. It also analyzes the role of positive accounting theory in influencing managerial behavior in response to new accounting policies. Furthermore, the report references relevant literature to support its analysis, providing a comprehensive overview of the key issues and implications of the new lease accounting standards. The report highlights how the new standard affects business models, financial reporting, and internal processes within companies. It also discusses the advantages and disadvantages of different lease classifications, emphasizing the potential tax benefits associated with operating leases and the impact on balance sheet presentation. The report concludes by emphasizing the importance of understanding and adapting to the changes in accounting standards to effectively manage financial performance.

Running head: ANALYSIS OF LEASE FINANCING STANDARDS
ANALYSIS OF LEASE FINANCING STANDARDS
Name of the Student:
Name of the University:
Author Note

1ANALYSIS OF LEASE FINANCING STANDARDS
Effect of change in accounting standard for lease
The change in the accounting standard for lease deeply effect the companies, mainly
those companies, which have the significant level of leases financing in their business. This
changes effect the financial position and performance as well as the operations of the firm too
(Joubert, Garvie and Parle 2017). The change in the accounting standard for lease affects the
companies in following ways: -
 The change in the accounting policy affects the business model and the offerings in
respect of the needs of the lease and behaviour of the leases. This also affect the
existing market development of leasing.
 The change in the accounting policy affects the financial reporting of the firm as the
new standard nearly eliminates all the balance sheet accounting for lessees. This also
refined the mainly commonly used matrix like EBITDA and gearing ratio.
 Change in the lease accounting standard deeply influences the business process,
control and system of the lessees. Company need to apply the new approach to adopt
the changes made in the accounting standards.
Apart from the above- discussed effect of the change in the accounting standard for lease,
this change also affect the various aspect of the company in various way. In this respect, the
effect of the new accounting policy become important to compensate the issues of change.
Operating Lease
The AASB 117 allowed the firm classify its lease in both operating lease and financial
lease (Aasb 2019). Although, the companies classified its most of the lease contract as the
operating lease. The followings are the some main reason behind it: -
 The financial lease required a large cash outlay. Hence, if the company will not use
the equipment for the long- term then the large cash outlay does not make any sense

2ANALYSIS OF LEASE FINANCING STANDARDS
(Cook, Kieschnick and Moussawi 2018). In this case, the operating lease provides
the advantages to the firm by reducing the requirement of cash outlay.
 The many equipment becomes out dated very quickly as the technology is rapidly
changing. Hence, the operating lease is more suitable for the firms to keep them up
to date.
 The purchase of equipment recording in the balance sheet increases the debt of the
firm and the decrease the available cash of the firm. This negatively affect the
presentation of the balance sheet of the company. To avoid this, the company
classifies its equipment purchase in operating lease and treat the expenses as the
operating expenses.
 The most important advantage to classifying the equipment in the operating lease it
that the operating lease provides the potential tax benefits. As this allows the firm to
deduct the payments as the operating expenses during the paying period.
Positive accounting theory and behaviour of managers
The positive accounting theory analyse the choice of accounting policy made by the
firm and responses of the firm towards the newly introduced accounting policies (Penno
2017). The behaviour of the managers is effected by the new accounting policy. The positive
accounting policy positively affect the behaviour of the managers. The positive accounting
policy increase the efficiency and the other aspects of the managers. Hence, the positive
accounting policy is direct and positive relation with the behaviour of the managers.

3ANALYSIS OF LEASE FINANCING STANDARDS
References
Aasb 2019. [online] Aasb.gov.au. Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB117_07-04_COMPapr07_07-07.pdf
[Accessed 23 May 2019].
Cook, D.O., Kieschnick, R.L. and Moussawi, R., 2018. Operating leases and corporate cash
holdings. Available at SSRN 2980895.
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. The
Journal of New Business Ideas & Trends, 15(2), pp.1-11.
Penno, M., 2017. A Positive Theory of Accounting-Based Management by Exception.