Accounting for leases is quite significant in the business reporting framework for its role in asset acquisition and valuation and for bank use in securing credit. Leases under AIS 17 are classified as a finance lease or an operating lease. A finance lease is a lease that transfers in totality all the risks and rewards inherent in ownership of the asset.
On the other hand, an operating lease is any lease other than the finance lease. The accounting treatment depends on the nature of the lease. The treatment is to create a lease asset and liability at the beginning of the lease. The new lease recognition will alter the financial reporting approach as leases will have to be factored in the balance sheet. Besides, it will require systems developers to design new software to help manage leases as part of assets and liabilities.
Content
Introduction
How companies are required/ expected to account for leases under ED/2013/6 Leases
Reasons why the IASB has issued ED/2013/6 Leases to replace the existing standard
Possible impact the new recognition with having to the operation of companies
Bibliography
Executive Summary
Accounting for leases is quite significant in business reporting framework for its role in asset acquisition and valuation and for bank use in securing credit. Leases under AIS 17 are classified as a finance lease or an operating lease. A finance lease is a lease that transfers in totality all the risks and rewards inherent in ownership of the asset. On the other hand, an operating lease is any lease other than the finance lease. The accounting treatment depends on the nature of the lease. The treatment is to create a lease asset and liability at the beginning of the lease. The new lease recognition will alter the financial reporting approach as leases will have to be factored in the balance sheet. Besides, it will require systems developers to design new software to help manage leases as part of assets and liabilities.
Keywords: Accounting reporting, new leases recognition, finance lease and operating lease
Introduction
Accounting for leases is very important to many entities because treatment of leases can affect asset acquisition process, and also affects an individual in securing finances from financial institutions. If well accounted for, it can minimize the organization exposures to risks associated with asset ownership ( IASB & FASB ,2011). Therefore, careful attention has been placed on the new lease requirements designed to help mitigate the weaknesses of the previous standards with a focus to improve transparency of lease reporting framework to investors and other stakeholders. This report will be presented to the Chief Financial Officer CFO of New Zealand and will address issues related to rationale for new lease recognition and its impacts to the business environment.
How companies are required/ expected to account for leases under ED/2013/6 Leases
Leases under AIS 17 are classified as either a finance lease or an operating lease. A finance lease is a lease that transfers in totality all the risks and rewards inherent in ownership of the asset. On the other hand, an operating lease is any lease other than the finance lease. The accounting treatment depends on the nature of the lease. The treatment is to create a lease asset and liability at the beginning of the lease.
The proposed treatment of the lease under draft Ed/2013/6 created a lease liability and a right of use over the assets. The leases are classified into two categories namely Type A and type B. Type A are non-property leases while type B are typically property leases. There must be a significant portion of the remaining useful life of the asset to constitute the term of the lease. At start, the lessee shall recognize the right of use of the asset less accumulated amortization and accumulated impairment losses. The lessee shall also measure the lease liability by increasing the carrying amount to reflect the slowdown of the lease liability and reduce the carrying amount to reflect the lease payment during the period (Nelson, 2003,p. 102).
Because of the inherent limitations and criticisms in the old system, the board now expects an entity to recognize assets as well as liabilities for both rights and obligations created. The new approach hitherto requires the lessee to recognize both assets and liabilities within the maximum possible terms and have a provision for an option to extend by more than 12 months. In adopting these new guidelines, it is expected that faithful representation of financial lessee position will be achieved. Besides, the system will promote enhanced disclosures and an improvement on lessee's financial leverage. The new model will also expect leasing activities of different lessors to be recognized.
Reasons why the IASB has issued ED/2013/6 Leases to replace the existing standard
GAAP and IFRS currently specify fewer than two categories of lease that is financial leases as well as operating leases. The rule does treat the leases differently. For instance, the two accounting standards do not require lessees to recognize the assets and liabilities arising from the financial lease transactions. The model stipulated is a joint effort between FASB and IASB aimed at improving financial reporting and to help mitigate the criticism that were arising in the current practice and treatment of leases (Nobes, 2005,p.30). First, this was in accordance with a request from several recommendations including US Securities and Exchange Commission (SEC) and other reports on the need to enhance transparency in reporting of leases. Consequently, there was also need to ensure that the user’s needs were fully catered for in the financial statements. It was found that many users were adjusting their financial statements so as to capitalize on lessees operating lessee. These have often resulted to different interpretation and lack of uniformity in the accounting reporting requirements. The old model had two separate approaches whereby both assets and liabilities were never recognized. This means that one particular transaction could easily be accounted for in different ways due to lack of standard application (Kilpatrick, Bob & Wilburn, 2011, p.56).
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- David Ikanyi (Autor), 2018, Accounting Standard and Regulation Report, Múnich, GRIN Verlag, https://www.grin.com/document/387274
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