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.
Table of Contents
1. Introduction
2. How companies are required/ expected to account for leases under ED/2013/6 Leases
3. Reasons why the IASB has issued ED/2013/6 Leases to replace the existing standard
4. Possible impact the new recognition with having to the operation of companies
Objectives & Core Topics
The primary objective of this report is to analyze the rationale behind the new lease recognition standards under ED/2013/6 and to evaluate the consequential impacts on business operations, financial reporting, and corporate internal control systems.
- Evolution of lease accounting from AIS 17 to the new ED/2013/6 model.
- Rationale for the IASB and FASB joint initiative to improve transparency.
- Transformation of balance sheet reporting for assets and liabilities.
- Operational changes involving internal controls and IT software development.
- Tax treatment implications resulting from modified accounting principles.
Excerpt from the Book
Possible impact the new recognition with having to the operation of companies
With the possible changes in leases, recognition may impact businesses and corporate entities in different ways. First, there will be changes in financial reporting that will be required to be restated with the possible effects of the changes. There is probably the lease accounting model which may require up scaling the skills of employees and increasing the resources since the voluminous transaction will be recognized in the balance sheets. This will also be followed by thorough monitoring on the lease terms and taking notes on residual value and the overall impact on purchase options.
Secondly, corporate entities expect changes in internal controls and the organizations processes. Over the past, there has been no need for management to institute internal control measures surrounding leases managements. With this proposal going through and the provision to re-access leases on periodical basis, it will call for scrutiny on lease measurement. This will require all businesses to develop effective controls to help protect leases as part of company assets.
Thirdly, another eminent change expected in the organization is the use of IT and development of lease accounting software's to assist in effective determination of lease entries. The systems developers and programmers will have to design and build new systems to help manage the new standards (Lindberg & Seifert, 2010, p.242).
Summary of Chapters
Introduction: Provides the context for the importance of lease accounting and explains how the report aims to address the rationale and impacts of new lease recognition standards for stakeholders.
How companies are required/ expected to account for leases under ED/2013/6 Leases: Details the classification of leases into Type A and Type B and describes the recognition of lease liabilities and right-of-use assets.
Reasons why the IASB has issued ED/2013/6 Leases to replace the existing standard: Explains the limitations of previous rules and the collaborative effort between FASB and IASB to enhance transparency and financial statement consistency.
Possible impact the new recognition with having to the operation of companies: Discusses the practical implications of the new standards, including the necessity for internal control updates, IT infrastructure development, and changes in tax accounting.
Keywords
Accounting reporting, new leases recognition, finance lease, operating lease, IASB, FASB, ED/2013/6, financial statements, balance sheet, transparency, internal controls, lease liabilities, right-of-use assets, tax treatment, IT systems.
Frequently Asked Questions
What is the primary focus of this report?
The report focuses on the transition in accounting standards for leases, specifically the move towards the ED/2013/6 framework and how it changes the recognition of assets and liabilities.
What are the central themes of the document?
The central themes include the rationale for replacing AIS 17, the shift toward a new lease recognition model, and the operational impact on corporate financial reporting and IT systems.
What is the main goal of the proposed standard?
The primary goal is to improve the transparency of lease reporting for investors and stakeholders by requiring that leases be factored directly into the balance sheet.
Which methodology is applied in this analysis?
The report utilizes a review of current accounting standards and collaborative efforts between the IASB and FASB to synthesize the expected impacts of proposed reporting changes.
What subjects are covered in the main section?
The main section covers the classification of leases, the specific requirements for recognizing lease liabilities, the reasons for changing current standards, and the organizational consequences of these adjustments.
Which keywords best describe the paper?
Key terms include lease recognition, finance and operating leases, IASB, financial reporting transparency, and organizational internal control adjustments.
How does the new standard affect lease classification?
The new proposal classifies leases into Type A (non-property) and Type B (typically property) categories, moving away from the previous reliance solely on the AIS 17 classification.
What are the implications for IT departments?
Systems developers are expected to design and build new accounting software capable of managing the complexity of the new lease recognition standards and tracking periodic measurement changes.
What is the consequence of the new rules on tax positions?
The new requirements on asset depreciation and the restriction of tax deductibles may influence the overall tax position of companies, requiring them to optimize their strategies accordingly.
Why is the new recognition approach considered necessary?
The current system lacked uniformity, and users often had to manually adjust financial statements to capitalize operating leases, leading to different interpretations of financial data.
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- David Ikanyi (Autor:in), 2018, Accounting Standard and Regulation Report, München, GRIN Verlag, https://www.grin.com/document/387274
