Financial Accounting Theory and Practice: IAS 17 and New Standards

This report examines the current lease standard, IAS 17, and the criticisms surrounding it, particularly regarding the lack of comparability among commercial organizations. It discusses the proposed changes by FASB and IASB to eliminate the distinction between financial and operating leases, requiring all leases to be disclosed on the balance sheet. The report explores the implications of these changes, including the criticism and consequences faced by firms using IFRS. It delves into the importance of high-quality lease accounting standards, the convergence project, and the classification of leases under IAS 17. The analysis covers the potential impact on financial ratios, the concerns raised by companies, and the effects of the new leasing standards on short-term leases and administrative costs. The report also includes positive reactions to the new standards and concludes by emphasizing the need for effective comparability and minimizing accounting rubric misuse. This report is available on Desklib, a platform offering AI-based study tools and past papers for students.

Running head: FINANCIAL ACCOUNTING THEORY AND PRACTICE
Financial Accounting Theory and Practice
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1FINANCIAL ACCOUNTING THEORY AND PRACTICE
Table of Contents
Introduction................................................................................................................................2
Discussion:.................................................................................................................................2
Conclusion..................................................................................................................................5
Reference List............................................................................................................................7

2FINANCIAL ACCOUNTING THEORY AND PRACTICE
Introduction
The current paper concentrates on the present lease standard of IAS 17, which has
been bounded by the criticism as an end result of untruthful accounting where the
comparability amongst the commercial organizations is unclear. With the intention of
overcoming this problem, the FASB and the IASB have incorporated the decision of
disclosing the new standards of leasing (GurgelMota et al., 2016). As cited in the exposure
draft of the new standard, the most understandable rectifications is that the differentiation
among the financial and operating lease will be eliminated which explains that the all the
transactions of leasing would be disclosed in the balance sheet (Deegan 2013). These
proposals have been bounded by the criticism as it will be having end results of the
organizations.
The aim and goal of this paper has been to gain knowledge about the criticism and the
consequences that are faced during the time of new lease standard that would have an effect
on the firms that make use of the IFRS and to gain knowledge about the fact that if the firms
have undertaken any preparations.
Discussion:
Internationally, leasing is regarded as the component of source of financing and
therefore, standards of lease accounting of the highest quality is needed. Currently, all the
companies that have been listed are needed to follow the accounting standard rules that is
issued by the International Accounting Standard Board. The IASB is regarded as a
corporation and their main intention has been to establish a lonely set of increased excellence
and internationally identified reporting standard which is known as IFRS(Weil et al., 2013).

3FINANCIAL ACCOUNTING THEORY AND PRACTICE
FASB and IASB in collaboration incorporated the convergence project in the year 2002 a key
step that was taken towards the global international accounting harmonization.
IAS 17 classified the leases as the operations of finance. The transformations among
the two leases is that the organizational lease leads to an asset and liability on the balance
sheet and on the other hand the operating lease is in nature solitary that has been disclosed as
expenses in the footnotes. The finance lease may be equated to the debt fiancé bought while
the operating lease could be computed to the stable rental agreement (Chauvey et al., 2015).
The IASB 17 aids the firms to evaluate the lease transactions to themselves in order to
categorize the lease of contracting.
IASB establishes the regulations and procedures in relation to the recognition of the
financing of lease. But the condition that is specified is regarded to be confusing and in order
to achieve the suitable organization exploitation may occur. There is high probability that the
businesses will categorize the lease agreements as operating lease instead of financing lease.
Thus the categorization of the leases as operating lease will enable the organizations to get
the assets while the debt structure of the company remains unaffected. This will definitely
make the organization financially strong (Paterson, 2016).
In spite of the fact that each and every company utilize the facility of leasing for
accessing the assets they provide on kind basis, the amount for which they lease vary with the
terms and structure of the contract for which it is leased. The difference in such contractual
terms may arise due to the application of the leasing standards in different industries and the
adoption of a new leasing standard (Wong & Joshi, 2015).
The changes that have been proposed in lease accounting establish the fact that the
financial users will be able to depend on the leasing transactions undertaken by the entity.
However the changes that have taken place in lease accounting has proven to be a topic of

4FINANCIAL ACCOUNTING THEORY AND PRACTICE
controversy and therefore companies have faced the consequences for implementing IFRS.
The introduction of new leasing standards especially short term leasing will lead to right to
utilize of liability and asset as well. Consequentially the balance sheet of the companies that
have been impacted offset for the changes in the significant ratios of the company. The firms
that have enough operating lease may opt for having their own balance sheets and the
significant ratios might be impacted by the introduction of such new leasing standard.
The proposal of capitalizing the operating leases may also lead to impacting the
financial ratios in a huge way. However it has been noticed that the effects may be restricted
to the retailing industries. This is because of the fact that the retailers are engaged in leasing
properties of large sums. Further the investigation of the exposure draft has revealed that
reduced return on capital, reduced turnover ratio and reduced debt equity ratio may severely
affect the capability of a certain company to receive bank financing (Annan, 2014).
The comment letters that have been issues to the FASB and IASB state their reaction
in relation to the new lease standard. Within four months of the publication of the exposure
draft a huge number of comment letters have been received. They were of the opinion that the
cost of leasing would ultimately offset the benefits obtained from the activity of leasing. Even
the deterioration of the significant ratios raised huge concerns.
The major concern in relation to the new leasing standard is that it has resulted in
much criticism as such a standard did lead to capitalization of operating lease and ultimately
lead to increase in the debt structure of the company. This would essentially mean that the
recent structure of debt of the companies had to exclude leasing contracts. Another concern
that was raised was that the new leasing standards would make it harder for the companies to
receive credit from the market (Pacter, 2014).

5FINANCIAL ACCOUNTING THEORY AND PRACTICE
In case of short term leases the management of certain companies are of the opinion
that the segregation of operating and financial leases will be substituted with the
implementation of the new leasing standards. This is because the firms will curb the terms of
lease in order to obtain more profit.
For instance the auditors are of the opinion that the consequence of the short term
lease would be reflected in the financial statements. Numerous organizations have let out
their concern that the expected leasing market would change as assets would be purchased
rather than taken on lease (Annan, 2014).
Further more the organizations have criticized the new standard of leasing because it
would result in unprecedented increase in the administrative costs. Efforts made in the
educations of the new standard of lease, new system of IT, changes in process system and
increase amount of expenditure in the consultant fees is considered to be the common
examples of such a situation. This would also result in ore consumption of time as because
detailed assumptions in regards to the liability of lease and the right to utilize the asset shall
be carried out in accordance to IAS 17 (Wong, Wong & Jeter, 2016).
However the new standard of leasing also has received positive reactions. For
instance the Hewlett-Packard company have acknowledged that there is an issue with the IAS
17 and that the categorization of the contracts have not been done fairly. HP has
recommended alteration of the lease accounting standards by making the current standards
more efficient. However some of the experts are of the opinion that in regards to the leasing
standards a new standard is needed.

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Conclusion
The replacement of the current standard of leasing, IAS 17 eradicates the probability
for the organizations to choose among the financial and the operating leasing. In the future
time period, all the leases would be classified as finance that recommends that lease would be
recognised as the asset and the liability on the balance sheet. The transformations that focuses
on the standard of leasing is essential to gain effective amount of comparability amongst the
business and minimise the mistreatment of the accounting rubrics. Even though the process of
setting the standard has been featured by the criticism, postponement and disagreement,
which makes that IAS 17 replacement is regarded to be a debated subject.

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Reference List
Annan, M. (2014). The Case of Lease Accounting (Doctoral dissertation, University
of Amsterdam).
Annan, M. (2014). The Case of Lease Accounting (Doctoral dissertation, University
of Amsterdam).
Chauvey, J. N., Giordano-Spring, S., Cho, C. H., & Patten, D. M. (2015). The
normativity and legitimacy of CSR disclosure: Evidence from France. Journal of Business
Ethics, 130(4), 789-803.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
GurgelMota, R. H., de Oliveira, A. F., Niyama, J. K., & Paulo, E. (2016).
STANDARDS BASED ON PRINCIPLES AND RULES: A COMPARATIVE ANALYSIS
OF THE IASB AND FASB STANDARDS. REVISTAAMBIENTECONTABIL, 8(2), 19-
39.
Nicoleta, G. C., & Victor, M. (2014). Comparative Study Regarding Financial
Communication by Means of Annual Financial Statements–IASB/FASB. Ovidius University
Annals, Economic Sciences Series, 14(1), 617-621.
Pacter, P. (2014). IFRS as global standards: a pocket guide. IFRS Foundation.
Paterson, R. (2016). Off balance sheet finance. Springer.
vanMourik, C., &Katsuo, Y. (2014). The IASB and ASBJ conceptual frameworks:
Same objective, different financial performance concepts. Accounting Horizons, 29(1), 199-
216.

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Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction
to concepts, methods and uses. Cengage Learning.
Wong, J., Wong, N., & Jeter, D. C. (2016). The Economics of Accounting for
Property Leases. Accounting Horizons, 30(2), 239-254.
Wong, K., & Joshi, M. (2015). The impact of lease capitalisation on financial
statements and key ratios: Evidence from Australia. Australasian Accounting Business &
Finance Journal, 9(3), 27.