Key Features Of The Current Accounting Standard Essay

Length: 10 pages Sources: 1+ Subject: Accounting Type: Essay Paper: #36778664 Related Topics: Ifrs, Cost Accounting, Accounting, Aircraft Maintenance
Excerpt from Essay :

IAS 17 Leases

Explain the key features of the current accounting standard. You should use at least one illustrative example for lessee accounting from a published set of financial statements to illustrate the effect of the standard

IAS 17 accounting standard establishes and elucidates the pertinent accounting procedures and also disclosures that are supposed to be employed in accounting by lessors and also lessees. The lessor is the owner of the underlying asset while the lessee is the party that opts to make use of the asset at that point in time. One of the key features of the accounting standard is the classification between an operating lease and a finance lease. A financial lease is a contract or agreement whereby all of the risks and the rewards that are characteristic to the ownership of the asset are transferred to the lessee. On the other hand, an operating lease is a lease that is not classified as a finance lease. Classification is a very important aspect and key feature of the accounting standard. The risks that are associated with the lease include the taking care of the costs of the maintenance of the asset or also incurring the loss in terms of the depreciating value of the asset due to it become technologically out of date. The rewards on the other hand which are associated with the asset encompass making use of the asset for significantly the whole useful life of the asset and also making the most out of the profits that emanate from using the asset. In addition, with regards to the finance lease, the ownership of the asset passes on to the lessee when the leasing period comes to an end. The lessee also has the chance to buy the asset at a cost that is considerably lower compared to the value of the asset. A finance lease is categorized when there is minimal or no risk at all to the lessor. The leasing period is almost as the useful life of the underlying asset. Any lease that is existing has to be classified between the two kinds (International Accounting Standard 17).

The lessee is expected to present the accounting of the lease in the financial statements that are published once he or she acquires the asset being considered. The following is an illustration on how the lessee is expected to present the leases on the financial statements.

With regards to the operating lease, the rent payments are the ones that are presented. The journal entry is as follows:

Dr: Rent expense account

Cr: Cash account

With regards to financial leases, it is the lease obligation that is accounted for. The journal entry that is presented in financial statements is as follows:

Dr: Leased asset

Cr: Lease obligation

Problems Arising from IAS 17

IAS 17 which is lease accounting has constantly had problems arising within the accounting profession simply due to the way in which certain leases are accounted for in a company's comprehensive income state and/or the statement of financial position. The major problem is the capability to manipulate the financial statements of a company simply by falsely or inaccurately categorizing financial leases as operating leases which in turn results in off balance sheet finance. Another problem is that accounting for leases in IAS 17 complicates economic reality or actuality. This is for the reason that IAS 17 is in conflict with the accounting framework (IFRS, 2013). When it comes to operating leases, the only amount that is presented or displayed in the financial statements is the annual or yearly lease payments, which are actually charged to the statement of comprehensive income. On the other hand, for financial leases, the present value of the forthcoming or impending payments under the lease is presented or displayed as a liability and on the other side of the statement of the financial position on the right to the financial asset. There are examples or cases that take place where the items in the financial statements in accordance to the accounting framework ought to be reported in the statement of financial position but as a result of the contradiction or conflict that there is with IAS 17 they are not displayed or presented. One good example...

...

Aircrafts as assets are not displayed on the statement of financial position for the reason that airplanes are not actually leased for their entire useable life. They are normally leased for just 7 years and for this reason have to be classified as operating leases. Nonetheless, the company that owns the airplane as an asset is mandated to make payments over the leasing period and the company is not able to escape from the lease as it is non-cancellable.

Changes proposed to IAS 17 by the Exposure Draft

Under the contemporary requirements in IAS 17, the accounting for any lease is reliant upon how it is classified. If a lease is classified as an operating lease then this amounts to the lessee not being expected to record or report any assets or liabilities in the balance sheet. This particular exposure draft that was published in May 2013 makes a proposal for changes so that there can be the removal of this dissimilarity or difference by having a requirement that lessees ought to make recognition of assets and liabilities for the obligations as well as the rights that are generated by the leases. These changes proposed will have an impact on lessor accounting and lessee accounting as discussed below.

1. Lessee Accounting

In accordance with the proposals made in the exposure draft, a lessee will make recognition of a right of use (ROU) asset which is the underlying asset together with a liability to make lease payments for all of the leases which extend for a longer period than one year all presented in the Statement of Financial Position. It is important to note that a lease contract or agreement transfers or caries the right of use of an asset, which is the underlying asset for a certain period of time, in interchange for consideration. These changes of making recognition of ROU asset as well as the liability to make lease payments for all of the leases extending more than a year will have some business consequences for firms.

Different from the exposure draft presented in the year 2012, this particular new exposure draft does not make application of a single lessee model of accounting but rather makes application of a dual model for lease expenses. This twofold approach for lease expenses determines the succeeding or consequent accounting for the recognition of the lease expenses. The principle or the standard that is employed for determining which of the two approaches to make application of is centered on the consumption of the underlying asset to be leased. This mirrors the perspective of the International Accounting Standards Board (IASB) that there is dissimilarity between a lease in which the lessee recompenses for the consumption of a considerable part of the underlying asset for the duration of the leasing period and a lease for which the lessee simply pays for making use of the asset. The exposure draft that is presented makes use of this perception in a basic and easy manner by differentiating or making distinction between leases of Type A and leases of Type B. Determining this difference is reliant on whether the lese is a real estate lease or not. This is centered on the fact that for majority of the leases which are for real estate or property, the lessee basically makes use of the underlying asset and does not make consumption of it in a significant manner. In a contrasting way, the exposure draft proclaims that a lessee usually makes consumption of parts of any equipment or vehicle that it leases in a considerable manner. Subsequent to initial recognition, the liability for the lease payments is accounted for through amortizing the cost dependent on particular adjustments, whereas the right of use asset is recognized at the cost amount after deducting accumulated impairment and amortization. The classification or distinguishing of the leases as to whether they are Type A or Type B has an impact on the calculation of the lease expense of the lessee as well as how it is presented (IFRS, 2013).

With regards to Type A leases, there is a separate recognition of a finance charge for the undoing of the discount on the liability of the lease from the charge for amortization for the right of use asset. The effective interest method is what will be employed to measure the unwinding of the lease liability. On the other hand, the right of use asset will be amortized by making use of the straight line method except if another method of depreciation or amortization is more illustrative of the manner in which the lessee anticipates to consume the future economic benefits of the right of use asset. Taking this into account, the total expense…

Sources Used in Documents:

References

IFRS, May 2013, Exposure Draft Leases, IFRS Foundation.

IFRS, May 2013, Exposure Draft Leases: Illustrative Examples, IFRS Foundation.

International Accounting Standard 17: Leases. IFRS Foundation.

Epstein, B.J., Jermakowicz, E. K, 2008, Wiley IFRS 2008: Interpretation and Application of International Accounting Financial Reporting Standards. Hoboken: John Wiley and Sons, Inc.


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