AASB 117 and IFSR 16-Free-Samples for Students-Myassignmenthelp

Question: Discuss about AASB 117 and IFSR 16 Lease. Answer: Business Report This business report, comprehends a brief detail about the AASB 117 which is an accounting standard made by the Australian accounting standard board. In addition to this, a comparison between AASB 117 and the IFSR 16 in context to the accounting based treatment for leases is also discussed, in order to clarify the both accounting standards(Henderson, Peirson, Herbohn, 2015). This report also embraces the impact of the changes because of the new accounting standard i.e. IFSR 16 on financial reporting. The business report is prepared by considering the, Genworth Mortgage Insurance Australia Limited, which is engaged in the business of loan mortgage insurance. Some recommendations are also being provided to the management of Genworth Ltd. regarding the practice of the new accounting standard for accounting treatment of leases: so that, the business processes shall be continued without any legal interruption that could be occurred due to the negligence of practicing accounting standard while preparing financial statement of company. AASB 117 Leases The Australian Accounting Standard Board made an accounting standard on 15th July, 2004; i.e. AASB 117, in regards to the accounting treatment of leases. This accounting standard comes under Corporation Act 2001`s section 334(Clarke, 2012). The main objective of the AASB 117 is to set some guidelines for the lessor as well as lessee in context to the applicable policies of accounting and disclosure which shall be applied in context to the leases. A lease can be defined by considering the AASB 117, as an agreement which encloses the right to use an asset conveyed by a lessor, to a lessee for a fixed or specific time period in return for a compensation or series of payment(Freeman Freeman, 2015). Lessor is the one, who owns or possess the asset. Asset`s legal title is retain by the lessor. Payment is used to be received by the lessor for conveying the right to use the asset to the lessee. On the other hand, lessee gets authorized to use the asset with a right, however, payment shall be made to the lessor by the lessee for such authorization. The AASB 117, standard is applied to all the leases apart from- licensing agreements for items, such as, copy rights and patents, video recordings, motion pictures and play manuscripts; and the leases to use or explore for natural gas, oil, minerals and similar regenerating resources(Mills Woodford, 2015). In addition to this, the standard cannot be applied as a basis of measurement for- Investment property as well as biological assets provided by lessor subsequently, under operating leases. Asset apprehended by lessees which is accounted for as an investment property. The transactions in context to the leases are used to be recorded in following way: The finance and operating lease is recorded in the books of accounts of Lessee as- Type of lease Transaction Debit (Dr.) Credit (Cr.) Finance Lease Lease asset Lease Liability Operating Lease Lease Expense Cash Recoding of finance and operating in the books of accounts of Lessor Type of lease Transaction Debit (Dr.) Credit (Cr.) Finance Lease Lease receivable (Asset) PPE (Asset) Operating Lease Cash Revenue Finance Lease and Operating Lease A lease can be categorized as finance lease, as when the agreement of lease, transfers substantially all the rewards as well as risks incidental to ownership. In contrast to this, a lease can be categorized as operating lease, as when the lease agreement do not transfers substantially all the rewards and the risks incidental to ownership. Company`s income statement: (Source- https://member.afraccess.com/media?id=CMN://2A845303filename=20150227/GMA_01603637.pdf) The above leases are included as operating leases. There is variation in terms, renewal rights and escalation clauses of leases. The payment of lease are identified as an expenditure in statement of profit and loss on basis of straight line on the duration of such leases. AASB 117 and IFSR 16 Comparison between AASB 117 and IFSR 16 in lessee`s perspective: On basis of IFSR 16 AASB 117 Balance sheet The capitalise present value of payments for lease are regarded as an asset Finance lease are represented on the balance sheet. Whereas operating leases are regarded as off-balance sheet(Marsden, 2010). Classification No classification of leases; Unitary model of accounting(Poppleston, 2017) Leases are categorised as operating leases and finance leases Income statement The operating lease expense are replaced by lease expense and depreciation charge Recognition of operating lease expense through a straight lie basis Impact of IFSR 16 on company`s financial reporting IFSR 16 is a new accounting standard which is enforced to disregard the off-balance sheet financing. The application of the new accounting standard i.e. IFSR 16 will put an impact on Genworth`s financial statement(Rahman, 2016). According to this standard, the lease liability will be categorized as a financial liability; as a result, it will impact on the financial indebtedness, convents and ratios in the balance sheet. Changes on the company`s balance sheet will be in such a manner- Asset- Assets of lessee will be increased by the amount of operating issues. Beside this, an exemption will also be there; underlying assets of low value or lease term of one year or less and. Liabilities- The liability of the lessee will also be increased by the amount of their binding obligations mentioned within the agreement of lease as in case it is a financial liability. Profit and Loss- As a replacement for of the expenses on lease, 2 items of expenses will be recognized by the lessees in the profit and loss statement; the expense on interest under lease liabilities and depreciation of the right of use asset. Recommendations Company is being recommended to changeover its old mechanism for accounting treatment of leases as per the guidelines of the new accounting standard IFSR 16 Leases standard. As when this accounting standard will be practiced then the Genworth Ltd. will have to make certain changes, for instance, the company shall replace its accounting model in a single accounting model by disregarding the dual accounting model(Greite, 2013). This means, company shall lays emphasis on unitary model of accounting and do not made distinction in operating lease and finance lease. Recommendations for the company are as follows: The management of the Genworth ltd. shall evaluate the inventory of leases to assess the totality. If the information is not recorded by the management about the leases, then it is mandatory for company to capture all the requisite information and maintain a comprehensive list of lease documentation. Analysis of lease contracts shall be considered by the company to define their accounting and classification under IFSR 16. Legal opinions could be considered by management for such analysis(Shaw Wild , 2015). It is also recommended to the company to model the provisions of standards on company`s earning profile and balance sheet. In addition to this, the impact of such model shall be analysed on financial pacts. It must be considered by the management to plan for communicating the impact of practicing IFSR 16 on business processes and the related information to the banks, analysts and investors. The IT system of the company shall also capture the comprehensive details of the lease. It is recommended to the management to consider the renewal options of leases besides the pricing and terms of conditions(Poppleston, 2017). The impact of IFSR 16 will not only be on finance but also on other business processes as well. Hence it is recommended for the company to involve its legal, procurement and IT to carry out the practice of new standard for leases and the training plans as well as communication of the impact shall be considered in effective manner Press release Description of leased Assets Company`s balance sheet The adoption of IFSR 16 has resulted as increase in liabilities and material assets Company`s lease expense profile is given below: The above image, depicts the lease expense profile in context to the application of IFSR 16 and AASB 117 over leases. Amortization of assets is being done on the basis of straight line method. The expenses on leases ascertained in profit or loss over the term of lease under AASB 117 and IFSR 16 is the same. Though the pattern of ascertain the expenses related with lease is different as illustrated above. Company`s changeover to the new accounting treatment which is requisite as per IFSR 16 Leases The company will carry out the accounting treatment of leases as per the guidelines of the new accounting standard i.e. IFSR 16 Leases. An effective project governance will be considered in preparing for the changeover to the new accounting standard. For that reason, representatives or head of the following department of the company will be involved in palling and discussion- Operations Tax Information technology Procurement Investor relations Finance/Accounting Property/ Real estate; and Treasury It is important to involve all these department`s representatives in the planning and establishment of the new standard of accounting, as this standard will not only put its impact on the finance department but also on other business operations. The practicing of unitary model of accounting will be laid emphasis by and operating lease as well as finance lease will also not be regarded as two different leases(Dagwell, Lambert, Wines, 2012). All the requisite information about the leases will be documented by the company so that this information could be used further while accounting treatment of the leases. In addition to this, the lease contract`s detail will also be documented and so that their classification and accounting could be done as per the IFSR 16. Legal opinion would also be taken regarding the practicing of the new standard(Rahman, 2016). The impact of the practicing of the new standard i.e. IFSR 16 will be communicated to the company`s stakeholder (investors, analysts, bank etc.) so that they could be known of the facts and the related required information will also be disclosed to them. References Clarke, E. (2012). Accounting: An Introduction to Principles + Practice. Cengage Learning. Dagwell, R., Lambert, C., Wines, G. (2012). Corporate Accounting in Australia. Pearson. Freeman, S., Freeman, J. (2015). Financial Accounting: A Practical Approach. Pearson Higher Education AU. Greite, S. (2013). The Development of the Australian Accounting Standards After the End of the G4+1. Grin Verlag. Henderson, S., Peirson, G., Herbohn, K. (2015). Issues in Financial Accounting. Pearson Higher Education AU. Kimmel, P. D., Weygandt , J. J. (2013). Accounting Principles. Marsden, S. (2010). Australian Master Bookkeepers Guide [2009/10]. CCH Australia Limited. Mills, A., Woodford, W. (2015). Company Accounting. Cengage Learning. Poppleston, R. (2017, 1 30). IFRS 16, Leases. Retrieved from www.ownet.co.uk: https://ownet.co.uk/ifrs-16-leases-implementation/ Rahman, A. R. (2016). The Australian Accounting Standards Review Board. Routledge. Shaw, K., Wild , J. (2015). Fundamental Accounting Principles. Wiley. Warren, C. S., Reeve, J. M. (2017). Accounting. South-Western College Pub.