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HI6025 Analysis of Australian Accounting Standard for Lease Financing AASB 16 Assessment Answer

Assessment Details and Submission Guidelines
TrimesterT1 2019
Unit CodeHI6025
Unit TitleAccounting Theory and Current Issues
Assessment TypeGroup Assignment
Assessment TitleAccounting for Lease: A Critical Review
Purpose of the assessment (with ULO Mapping)
Students are required to critically examine the Australian accounting standard for lease financing AASB 16. They will have to do research on relevant literature and demonstrate understanding and critical evaluation of key issues such as the drawbacks of the previous lease standard, why was the change necessary, what changes have been incorporated in the new accounting standard for lease AASB 16. They will also need to conduct a minor empirical research (on a specified company) on accounting for leases.
(ULO 1, 2, 3, 4, 5, 6, 7)
Weight30 % of the total assessments
Total Marks30
Word limit3,000 words ± 500 words
Submission Guidelines
  • All work must be submitted on Blackboard by the due date along with a completed Assignment Cover Page.
  • The assignment must be in MS Word format, no spacing, 12-pt Arial font and 2 cm margins on all four sides of your page with appropriate section headings and page numbers.
  • Reference sources must be cited in the text of the report, and listed appropriately at the end in a reference list using Harvard referencing style.

Purpose:

Assignment Specifications

This assignment aims at developing a clear understanding of students on Accounting standard for lease. Students are required to critically examine the new accounting standard for lease financing AASB 16. They will have to do research on relevant literature and demonstrate understanding and critical evaluation of key issues and different provisions on accounting standard for lease financing. They will have to refer and base their discussions on a complete understanding of AASB 16 Accounting for Leases.

Required Task: In the body of the assignmentstudents will have to critically discuss the following issues:

  • Critical evaluation of the old accounting standard for lease (AASB 117) specifically highlighting the drawbacks
  • Why was the change necessary?
  • What changes have been incorporated in the new accounting standard for lease AASB 16?
  • How will companies that have significant level of lease financing be affected by the change in the accounting standard for lease?
  • In the former accounting standard for lease (AASB 117) both operating lease and finance lease were allowed, why did companies have a tendency to classify most of the lease contract as operating lease? How does positive accounting theory relate to this behaviour of managers?
  • According to the IASB, the implementation of IFRS 16 (the IFRS version of AASB 16) is expected to improve comparability between companies that lease assets and companies that borrow to buy assets. Explain this view of the IASB with suitable example.
  • The implementation of AASB 16 might have an effect on the leasing market if companies decide to buy more assets and as a result, lease fewer assets. Provide possible explanation as to why after the implementation of AASB 16, reporting entities might be more likely to buy more assets and lease fewer assets.
  • Select the latest (2017 – 2018 financial year) annual report of an ASX listed company. Summarise the key disclosures the company has made on its accounting for leases including on the transitional provision and effect of the transition to AASB 16 from AASB 117.

Answer

Accounting for lease: a critical review

Abstract

AASB 16 comes with innovative updates which are reflected in the business' balance sheets or in the individual bank statements of money. Since January 1, 2019, this kind of the system is immediately effective. This will transform the overall economic situation in Australia. This will ensure that the account of money is ignored and the lessons divide their presented leases on the operating standard or financially. This article will help identify the requirements of AASB16 and how it was improved, how it was affected, what was needed to bring changes, and this would help in identifying the benefits and discretion of the standard and process implementation.

Introduction

Australian Accounting Standard Board (AASB) prepares the Australian accounting standard with difficulties, brings and causes difficulties. AASB is the Australian Government association under the Australian safety and Investment Commission Act 2001. The use of the AASB 1057 Australian Accounting Standard distinguishes utilize of standards such as components and budgets. AASB 1053 forms the tiers of AAS, a detailed system that requires two stages of required creating a detailed budget report in a broader manner. AASB16 a single tenant presents the banking model and if the resources are not less respected, then all leases must be resident of liabilities and resources for more than one year. It is necessary to understand the right use of a resource that speaks the correct side to use the rental risk to use the rental assets to use the rental property and use the rental on the right. Australia is building a new center for the business enthusiasts. This is a small industry or a large scale set up for business, Australia is rich in resources or attracts a big crowd on the world stage. Everyone wishes to serve the country temporarily and therefore buy at least the property and the liabilities. Rental cars, business units, corporate offices, housing facilities, even Pc or laptops are also leased. In the decade many leasing options were cited in the classified section, which has no effect on the business letters of your business. They were considered operating only on income statements and related costs were properly preserved. There is pre-requisition of disclosure for residents in AASB-16. Applying the taxpayer's decision to the tenants for the purpose of financing the financial position of the budget for the implementation of money in the budget position, the implementation of money and the assessment of the rentals.AASB16 generously require money in banking AASB 117 lease. According to the requirement, a caterpillar shows its fares as the working leases and fund leases moreover unexpectedly represents those two types of leases (Ayuba, 2012).

AASB 16 also requires an extended disclosure by the lessor, which will improve the data on the lessor's risk statement, especially for lingering respect. This standard relates to the annual disclosure period beginning on and after January 1, 2019. Early applications for substance that are subject to AASB 15 and customer contract revenue are permitted as of and before date of the commencement of these standards.

Evaluation of old accounting standards of lease AASB 117:

The AASB uses all standards covered by Global Board of Accounting Standards. It was established to lease terms from January 1, 2005 (Bradshaw et al., 2010). They ensure that industry-neutral standards continue to be published for a variety of businesses. It can be a private or non-profit organization that works with public sector. The rental criteria quoted under this standard are:

  • In order to distinguish the relevant lease from the financial and operational directors, the lessee and the lessor are responsible for classifying their lease.
  • Financial Leasing: The lessee registers the allocated liabilities and assets at a lower interest rate and the valuation of the leased asset. The tenant can refer to minimum required minimum payment amount. This will ease the responsibility column. On other hand, the lessor is quoted according to leased investment plan. The total return is guaranteed in the economic sector for fixed time period.
  • Under the operational lease: Payment structure will be registered under the direct line of expenditure for total term plan of salary and, unless the user is given a beneficiary as a timeframe option. In this case the same is followed in the same way and till the contract for the term plan is considered as money and money on same money.
  • Operations and Finance Lease Agreement are considered as different approaches.
  • The amount payable at the end of the term can be selected based on the estimates approved for commercial requirements and assets (Cuccia, 2018).

In order to understand the Australian government's entire overview of the accounting standards, a number of questions are listed. Different techniques are used when analyzing lease agreement. Businesses listed under Australian Accounting Standards are considered a group. They compared and analyzed the current moreover previous yearly reports to answer following questions.

Why was the change necessary?

In the case of leases under financial and operating services, number of the assets is not recorded under any of the headings and is noted to be important to the business and task force concerned. Under economic leasing, lots of liabilities lose their meaning and are underestimated due to unfair norms. Data analysts moreover bankers often adjust the lease option of their lessees and lessors when choosing an operating method. These conflicts have led AASB to recognize the need to make significant changes to the present system to avoid misunderstanding of a company's value-added asset as well as liabilities (Demir and Bas, 2017). Due to imperfect accounting standards, financial and operational executives face conflicts and the company's annual balance sheet faces losses. The changes brought about by AASB16 have revolutionized the financial system of the country and the company.

Changes that have been incorporated in the new accounting standard for lease AASB 16

Assets used for AASB 16 format should be ensured, or the property may be use for very short time period. All lease associated activities will also be in a front of the assets used for significant time and in front of liabilities listed under the existing rights to be used. The declaration will be written in the front of the lease expense listed in returns (Haslam, 2017). This can be inclusive list of profits or losses or both, but these companies will not be rejected at this time. Under the interest earned by lease agreement, not as rental business, operating expenses will be mentioned. The difference between the resources and resources required by the business and the production units has been bridged and the results of the final product are being completed to the customers.

Companies that have a significant level of lease financing be affected by the change in accounting standards for lease

By introducing AASB 16, all the leases were transformed into a financial lease. Operation Lease options were neutralized by accounting standards. These were selected as short term leases and minimum lease finance. By keeping company's equity valuation on a steady platform, the company's enterprise evaluation achieves high objectives. Free cash flow as well as EBITDA raised by several times. High stage of business evaluation leads to the level of impact of the business. The assets you are utilizing under leased documents will now have the ability to authenticate under the use price. 100% of business plans are reflected in balance sheets and a whole economic overview is seen in comparison to other businesses in market. There is the detailed explanation of the all assets use in balance sheets before the assignments (Matos and Niyama, 2018). That is why business partners, investors, affiliates, shareholders will get clear picture of the current state of business.

In former accounting standards for lease (AASB 17) both operating lease and financial lease were allowed, why did companies have the tendency to classify most of the lease contract as operating lease? How does positive accounting theory relate to the behavior of managers?

According to the type of property and nature, they were allowed to file their assets in the balance sheets like the property for the lease. The lease property has been defined as a direct line of earnings below. As long as the expiration date expires, any additional expense and expense business comes directly to making profits for business. The amount of investment, the accumulated depreciation cost for earnings from leased assets, was taken under the headers. If there are no users on a straight-line basis of Systematic Cash Flow, there are no other reasons for ensuring that the business comes from. All expenses incurred during the creation of the lease agreement are repaid at the end of the expiry and the company's profit is included in the balance sheet as a refund (Olibe, 2012). The management of the lease agreement gives the company maximum benefits and profit. Because the assets are not listed in the financial balance sheet of the company, long-term changes can be made and these options are available only if chosen by the Operation Lease Agreement. High level managers are not responsible for any kind of offense received in the system and hence are not concerned about the assets at the desired level.

According to IASB, the implementation of IFRS 16 is expected to improve comparability between the companies that lease assets and companies that borrow to buy assets

The effect of implementing IFRS16 will be seen at many levels of a company. The balance sheet now contains all the information about the payments and assets of the money taken under the lease agreement. They cannot be kept against each other but can be mentioned in the course. The lease expense will be filled with income from the income and the company will make profits from the beginning. This is a good amount of depreciation and not like operating costs. Therefore, many performance tools at the output level are affected. The most affected are EBITDA (Xu, Davidson and Cheong, 2017) .There is two categories divided into: Repaying the principal amount and paying interest over time. The likely results of the tab to keep tabs on the business are:

  • Targeted areas for bonus points
  • Remuneration scheme advised for strategic business growth 
  • Contingency observed in suitable business deals
  • Tax payments 
  • Debentures 
  • Paying dividends on a regular basis 
  • Capitalizing the business needs

To prevent unnecessary growth in the potential aspects of communications between the investor and company head, it is necessary to follow the protocols designed in IFRS 16 transit. Conditions must be negotiated properly and final end approval must be granted on both sides. In this new audit correction, there is a strong belief that money should be used before all aspects of a certain asset before agreeing with the leverage investment. Depending on the company's ability and market-based duration and payment structure, you must choose (Zakari, 2014). For example, it is wise to choose the property that is bought or bought for a short-term or long-term plan. Short-term plans are encouraged when security concerns are related to deficiencies and shortcomings. Only long-term projects are taken when evaluation of the company's good faith and balance sheet is appropriate.

Implementation of AASB 16 has an effect on the leasing market. The concerned companies tend to buy more assets and lease fewer assets:

It is easy to apply for an asset lease in this variable economy. Whether a person should buy a lease agreement or buy a property contract depends on the business. When the company reduces the investment and the liquidity is low, the Leasing option is selected. Every business is different in a different way. Whether to minimize the contract or to purchase property, different from one case (sewing, 2018).

Lease agreement for assets:

Pros: 

• Initial investment is weak. Leasing of property for less investment plans is advisory.

• Tax deduction for leased property is available.

• Flexible term plans are available and refund is not a problem.

• Repeat is always welcome in the Term Plan (Cieslewicz, 2014).

Cons:

• The overall cost is always higher than the purchase price. For example, if you rent a machine worth $1,000 and pay $100 a month for a year, then you are actually paying $1,200 and the machine is not your machine (Ayuba, 2012).

• You will never own the ownership of the item you purchased at the time of the lease. You are their rental target.

• Even if you do not use the asset within the specified time period, you must pay the full amount at the end of the lease agreement term.

One time purchase of assets:

Pros:

• You own the asset for a lifetime. Once you pay, you can use, sell, and lend assets and profit from them.
• Tax incentives come from the government. The capital invested in the purchase of assets can be tax-free.
• Savings can be generated by depreciation deductions
 (Bradshaw et al., 2010).


Cons:

• High initial investment One time investment is invested in a particular unit or asset. This accumulates capital in one place and lacks financial resources on the other. Investing in small figures can be tolerant, but when it is seen that huge figures are seen on the debited side of the balance sheet, it is difficult to see imbalances (Cuccia, 2018).

• Apparel wear and tear can be prolonged problems. You probably do not know what the property or the system has been purchased. If an old or defective system has been bought and it is not a refund policy then it’s a dead investment with zero return.

The durability of property is a big concern. If an invested asset is in bad condition it cannot be sustainable for a long time and you may spend more for a long time.

Therefore, instead of leasing property to a large extent, they have to purchase their property rather than for a long time to own property or get tax advantages from them. For a while, it is advisable to think of a lease agreement, but for a long time, someone should buy property and get the result. Depending on the needs of the business and channelizing the available capital, one should purchase or take the property on a lease. From a general perspective, it is advisable to purchase a small investment and advice for a large investment in leasing assets.

Key disclosures on financial reporting of an Australian company:

Any ASX listed company gives a detailed overview of the company's finances in the Annual Financial Report. It establishes reliable trust with the growth of investor, shareholder and market capitalization (Demir and Bas, 2017). Separating from the previous standards, adding new formats and many disclosures are mandatory. The main objectives of the company's financial policy are as follows:

• Have a Business Activity statement in the Australian Taxation Office. This statement includes all bills or payout techniques for each property and liability for the business.

• Accounting for business finance reports should be done according to Australian Security moreover Investment Commission (ASIC).

• The stock exchange report must be in the annual report.

For a lease agreement provided for business • Accounting standards should be followed as well as the appropriate format is required.

• Transitions from old standard to new things should be cited at the end of the last report.
• For 2017-2018 accounts, standards have been improved in AASB-117 from AASB-16, so the quotation needs to be recorded.

• Property tax payments are cross-checked and balance sheets are written on the reverse side.

Transition from AASB 117 to AASB 16: 

We have taken the financial yearly report of the Pitcher Partner to make the necessary changes to the lease agreement during the transit period. This is an ASX listed company which was engaged in leasing on their assets for lasting and short-term basis (Haslam, 2017). Due to the revision of accounting norms, they had to go through the following changes in their lease agreement:

● Retrospective method

● Cumulative catch-up method

Before submitting the final report in first step of the transit process, the commission will try to amend the commission. And in second case a complaint will be lodged with the necessary changes after submitting the final report.

One must ensure that agreement was done before the execution of the agreement and after that the transition can be applied only from AASB 117 to AASB 16.

 The new accounting standard, single format is based on the financial leasing agreement. All heads should be changed to fund the transition.

A person may apply for a short-term lease, such as a year and less; moreover get it at a discounted price. Consider a single practical approach that ignores theoretical applications from the process (Matos and Niyama, 2018).

Conclusion

As accounting standards change, people must modify the way they buy or lease business assets. If the assets and liabilities are planned accordingly, the cash flow can be maintained and the profit results can be seen in the balance sheet. At the end of the fiscal year, transmission from one standard to another may be critical. Overview of accounting standards: AASB 117, AASB 16 and IFRS are given in an accurate manner. The article puts forward a clear point of view on whether ASX listed companies adopts the current accounting standards for leasing options.

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