The globalisation of capital markets is driving the increasing convergence of accounting standards worldwide. Recently, the progress toward attaining a global financial reporting framework has accelerated, and many significant steps have been taken. The most important step is the formation of the International Accounting Standards Board (IASB), which replaced the International Accounting Standards Committee (IASC), as part of a comprehensive restructuring of the international accounting standard-setting organisation in March 2001. Since then the acceptance and adoption of International Accounting Standards/International Financial Reporting Standards (IAS/IFRS), hereafter referred to as IFRS, has been growing rapidly. From 01 January 2005 all publicly traded European companies shall account for their consolidated accounts according to IFRS. In accordance with § 292a German Commercial Code (Handelsgesetzbuch,HGB)German parent companies may account for their consolidated accounts only according to international accepted accounting standards, according to prevailing opinion such are IFRS and the United States Generally Accepted Accounting Principles (USGAAP).Due to the Accounting Law Ref-ormation Act (Bilanzrechtsreformgesetz,BilReG)all publicly traded German companies shall account for their group accounts according to IFRS from 01 January 2005 except those that are already applying US GAAP (from 01 January 2007). Furthermore all enterprises may account for their individual accounts according to IFRS in addition to German Commercial Code which still is obligatory for tax, and profit determination and distribution purposes. Due to the commitment of applying IFRS for consolidated accounts international financial reporting issues need to undergo a closer examination. This paper deals with the accounting for leases. First current lease accounting standards are described with a focus on IAS 17 and its key differences to US GAAP and German Commercial Code. Next proposed improvements on current lease accounting standards are dealt with, focussing on new approaches discussed in the accounting and lease literature and a possible treatment of leases with optional features. After this the proposed approaches’ effect on profit determination and distribution is discussed. The final part offers a conclusion to some of the issues raised in this paper.
Table of Contents
I. Introduction
II. International financial reporting for leases
A. Objectives of international financial reporting
B. Accounting for leases under IAS 17
1. Classification of leases
2. Accounting for leases
3. Key differences between IFRS, US GAAP and German Commercial Code
III. Improvements on current lease accounting
A. Assets and liabilities: Different perceptions
1. The IASB’s understanding of assets and liabilities
2. Should lease contracts be separated at all?
3. Leases and executory contracts
B. Measurement and accounting for leases under the new approach
1. Proposed lessee accounting under the new approach
2. Leases with optional features
3. Financial components approach vs. whole asset approach
4. Recent developments
C. Effects on profit determination and distribution
1. Operating leases vs. finance leases
2. Sale and leaseback transactions
3. Financial components approach vs. whole asset approach
IV. Conclusions
Objectives and Topics
This paper examines international financial reporting issues concerning lease accounting, specifically focusing on the limitations of current standards like IAS 17. The research aims to evaluate proposed reforms, such as the financial components and whole asset approaches, and to determine how these changes might impact financial statements, profit determination, and distribution.
- Comparison of IAS 17, US GAAP, and German Commercial Code.
- Critical analysis of current asset and liability definitions in lease accounting.
- Evaluation of the financial components approach versus the whole asset approach.
- Impact of accounting reforms on profit determination and distribution.
- Analysis of specific lease scenarios, including renewal options and contingent rentals.
Excerpt from the Book
3. Leases and executory contracts
The new approach of the McGregor special report only deals with the application of accounting concepts of lease contracts, it does not address the problem of a potential application to other forms of commitments and to executory contracts. So a constraint on lease contracts assumes, as Mellwig puts it, that leases have to be distinguished from other types of contracts. Unfortunately the McGregor special report’s definition of lease contracts does not satisfy this demand. Even though the authors recognise the need to distinguish leases from other contracts they do not provide a concluding solution.
The G4+1 position paper addresses the question of executory contracts by substituting McGregor’s definition of assets and liabilities with a more traditional one which is: “Under these principles of financial reporting, an asset is defined in terms of a resource or right from which future economic benefits are expected to be obtained, rather than an item of property itself. Liabilities are defined in terms of obligations to transfer economic benefits.”
The G4+1 position paper concludes that leases can be distinguished from executory contracts by the fact that leases cease to be executory when the lessor has provided the lessee with access to the leased property for the lease term. The proposals issued under the G4+1 position paper would, therefore, not apply to executory contracts, including take-or-pay contracts or service contracts.
Summary of Chapters
I. Introduction: Outlines the shift toward global accounting convergence and the necessity of re-examining lease accounting standards under IFRS.
II. International financial reporting for leases: Analyzes the objectives of financial reporting, current IAS 17 standards, and key comparative differences across international and German frameworks.
III. Improvements on current lease accounting: Explores theoretical shifts in asset and liability definitions, proposed measurement models, and the resulting effects on profit metrics and lease transactions.
IV. Conclusions: Synthesizes the need for harmonized lease standards to ensure decision-useful information, emphasizing the conflict between theoretical ideal approaches and practical business realities.
Keywords
Lease accounting, IAS 17, IFRS, US GAAP, Financial components approach, Whole asset approach, Assets, Liabilities, Profit determination, Executory contracts, Substance over form, Capital leases, Operating leases, Financial reporting, Harmonization.
Frequently Asked Questions
What is the core focus of this research?
The paper evaluates current international lease accounting standards, identifies their deficiencies, and analyzes proposed improvements discussed in academic and professional literature.
What are the primary themes discussed?
Key themes include the distinction between finance and operating leases, the conceptualization of assets and liabilities, and the influence of lease accounting on profit determination.
What is the main objective of the study?
The primary goal is to assess whether alternative accounting frameworks, specifically the financial components and whole asset approaches, provide more reliable and comparable financial information.
Which accounting standards are compared?
The analysis compares the International Accounting Standards (IAS 17/IFRS) with US GAAP and the German Commercial Code (HGB).
What does the main body of the paper cover?
The main body details current standard-setting progress, theoretical models for lease recognition, the treatment of complex contract features like renewal options, and the impact of these on income statements.
Which keywords best describe the work?
Key terms include lease accounting, IFRS, IAS 17, financial components approach, and substance over form.
How does the financial components approach differ from the whole asset approach?
The financial components approach views separate rights and obligations as assets and liabilities, whereas the whole asset approach treats the leased property itself as the primary asset.
Why is the "substance over form" principle significant in this analysis?
It is central to determining whether a lease contract represents a genuine asset or liability, regardless of its legal framing, which is crucial for modern international accounting convergence.
- Quote paper
- Willem Sachse (Author), 2004, Accounting for leases, Munich, GRIN Verlag, https://www.grin.com/document/56562
