Corporate Accounting and Financial Reporting: Lease Accounting Report

This report provides a comprehensive overview of corporate accounting and financial reporting, specifically focusing on accounting for finance leases by lessees. It defines a lease and explains the roles of the lessor and lessee, emphasizing the legal obligations involved. The report details the lessee's analysis of lease liabilities and right-to-use assets at the lease's inception, including the calculation of lease liability using present value and the incremental borrowing rate. It outlines the ongoing accounting procedures for finance leases, such as amortization of the right-to-use asset and interest on lease liability, and the treatment of impairment and variable lease payments. The report references AASB 16 and discusses the criteria for classifying a lease as a finance lease versus an operating lease, highlighting factors like risk and reward transfer. It also explains the components of lease payments, including fixed and variable payments, and the reporting of leases in financial statements, including the income statement, balance sheet, and cash flow statement. The report covers disclosure requirements, including both qualitative and quantitative information, and concludes with a discussion of impairment loss calculations and journal entries, excluding inventories. The report draws on several academic references to support its analysis.

Running head: CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Corporate Accounting and reporting
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1CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part A
Accounting for finance leases by lessees
Lease is the legal obligation through which owner of particular asset hereby
called as the lessor permits the 2nd party hereby called as lessee for using the asset
for particular period of time in exchange of lease rents. The leased asset is used by
the lessee and in exchange the lessee makes regular payment to the lessor known
as lease rental (Joubert, Garvie and Parle 2017). At the inception of lease the lessee
analyses the associated liability and asset’s right-to use conditions. The analyses are
based on –
Lease liability – present value of lease payments are discounted on applicable
discounting rate for lease. The applicable rate is the implicit rate under the lease if
the rate can be determined readily. However, if the rate cannot be determined the
lessee shall use the rate of incremental borrowing (Krautter and Thompson 2015).
Right – to – use the asset – initial amount of lease liability in addition to the lease
payments that is payable to lessor before the inception of lease plus the initial direct
cost expensed, if any reduced by the amount received on account of the lease
incentive
Further, when the lessee has identified the lease as finance lease, he shall identify
the few things over the lease term. The things are – (i) ongoing amortization on
account of the asset’s right to use (ii) ongoing amortization on account of interest
payable on lease liability (iii) impairment of asset’s right to use, if any and (iv)
variable payment for lease that are not taken into consideration under lease liability.

2CORPORATE ACCOUNTING AND FINANCIAL REPORTING
As per Para 61 of AASB 16 on leases the lessor shall segregate the leases as
the finance lease or operating lease. The lease will be considered as the finance
lease if all the rewards and risks associated with the lease are transferred. On the
other hand, where the substantial risks and rewards associated with the asset are
not transferred the lease is considered as operating asset. Whether the lease is
operating lease or finance lease depends on the essence of the transaction and not
on the form of contract (Wong, Wong and Jeter 2016). The situations that in
combination with any other situation or individually lead to the lease being classified
as the finance lease are – (i) the lease is able to cancel the lease and the generated
losses on account of cancellation shall be borne by lessee (ii) losses or gains from
fair value fluctuation with regard to the residual value is accrued to lessee and (iii)
lessee is allowed to continue the lease term for secondary period in exchange of rent
which is substantially lesser as compared to the market rent.
The lease payment with regard to the underlying asset includes the payment
as – (i) fixed payment that includes the in-substance fixed payments reduced by any
amount payable as lease incentives (ii) any residual guarantee value that is provided
as guarantee by the lessee to the lessor (iii) variable payment for lease that is based
on the rate or index and it is measured through the rate or index initially at the date
of commencement (iii) exercise price of the purchase option if it is certain that the
option will be exercised and (iv) payments as penalties for termination of lease (Ali et
al. 2013).
At the commencement of the lease the lessor must identify the asset that is
held under the finance lease under the financial statement of the company is
presented at the receivable amount that is equal to net investment in lease. Under

3CORPORATE ACCOUNTING AND FINANCIAL REPORTING
various financial statements like income statement, cash flow statement and balance
sheet the lease are reported by the lessee as follows –
Income statement – expenses payable on account of interest on lease is recorded in
the income statement. The amount is computed on the amount of lease that is
payable at beginning through using the implied rate of interest under the lease.
Generally, the rate of interest that is used is lower among the implicit rate of the
lessor and rate of borrowing for the lessee (Wong and Joshi 2015). If the asset that
is being leased is depreciable, the expenses on account of depreciation are also
recorded in the same way as is recorded for other assets.
Balance sheet – the amount payable for lease as well as the lease asset is recorded
in the balance sheet and the payable amount on account of lease is recorded as
liability. The value that is recorded in the balance sheet is the lower among the fair
market value of the leased asset and the present value of future lease payments.
Cash flow statement – the interest part of lease payments is recorded as the
operating cash outflow. Further, the repayment of principle part that decreases the
amount of lease payable is recorded as the cash outflow for financing purpose
(Dakis 2016.). As per IFRS, the expenses on account of interest are recorded as the
financing cash outflow or operating cash outflow.
Under the disclosure the lessee is required to disclose the qualitative as well
as quantitative information regarding the leases and the important judgements made
with regard to measurement of the leases and amount identified under the financial
statement (Jamburia and Lankeviciute 2015). Various information required to be
disclosed by the lessee are – (i) narrative disclosures regarding the options
recognized under the lease liabilities and asset’s right to use option (ii) information of

4CORPORATE ACCOUNTING AND FINANCIAL REPORTING
lease that has not been commenced yet but created considerable obligations and
rights on the lessee. The lessee shall also disclose the requirement of future lease
payment (Xu, Davidson and Cheong 2017). However the company will determine
regarding how and in what format the disclosure shall be provided. Generally, the
format that is used by the company is the disclosure through notes to the financial
statements. However, the disclosures are subject to the internal controls, audit and
report of the management.

5CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part B
Impairment loss calculation
Journal entries –

6CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Note – the inventories are not considered for impairment as it is valued on cost or
market value whichever is lower.

7CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Reference
Ali, P., McRae, C., Ramsay, I. and Saw, T., 2013. Consumer leases and consumer
protection: Regulatory arbitrage and consumer harm.
Dakis, G.S., 2016. Upcoming changes to contributions and leasing
standards. Governance Directions, 68(2), p.99.
Jamburia, M. and Lankeviciute, V., 2015. Political Influences on the IASB Accounting
Standard-Setting: The Case of the Leases Standard.
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.
Krautter, W.F. and Thompson, J., LeaseASP Joint Venture, 2015. Automated system
and method for providing lease payment information to consumers via the internet.
U.S. Patent 9,117,243.
Wong, J., Wong, N. and Jeter, D.C., 2016. The Economics of Accounting for
Property Leases. Accounting Horizons, 30(2), pp.239-254.
Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial
statements and key ratios: Evidence from Australia. Australasian Accounting
Business & Finance Journal, 9(3), p.27.
Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements:
operating to capitalised leases. Pacific Accounting Review, 29(1), pp.34-54.