Discussion
Discuss about the Masters in Accounting for Journal of New Business Ideas & Trend.
The present discussion deals with disclosure and method of communicating to the clients regarding the transition to the new leasing standard in the company. The organisation proposes to form a team that would enable to specialist team to help clients with the transition to the new standard. The new accounting standard of IFRS 16 lease that the company will adapt from 1 January 2019, will impact the movable and immovable assets for certain leases such as leases. The lobby that is to be created in the organisation in order to assist the clients of the company regarding the adaptation of the new lease standard is essential.
AASB 16 Leases necessarily do away with the notion of operating as well as finance leases for particularly lessees that is presented under the directive AASB 117 for Leases. This necessarily replaces the same with a lone accounting model under which different lessees need to detect different leases (counting property as well as equipment) mentioned on balance sheet as a novel ‘appropriate usage of asset’ along with ‘lease liability’ (Laing and Perrin 2014) There are assets that are of extremely small value in addition to are exclusion of short term leases. In essence, the regulations for lessors have not considerably altered. The alteration to acquire majority of leases on balance sheet was essentially driven by particularly IASB to enhance level of transparency, revelation of leasing actions of companies as well as comparability.
As rightly indicated by Dakis (2016), the alterations in accounting are not restricted to the balance sheet. Essentially, for instance, lease expend outline shall remain front-loaded in case of majority of the leases, when disbursements for rentals are constant every year. Again, novel information is also necessary to uphold the process of ascertainment of innovative judgments along with approximations utilized in the enumeration of different leased asset as well as liability on date of inception and throughout period of lease. In essence, these consists of terms of lease, rates of discount, in-substance payments of lease, specific rents associated to a particular rate otherwise index, anticipated disbursements under assurance of residual value and addition of various purchase options along with termination disbursements.
Even though the economic advantages along with leasing risks do not necessarily alter, novel lease accounting model shall alter important financial dimensions, KPIs and initiate volatility to the entire balance sheet, statement of profit or else loss owing to frequent re-measurement necessities. By itself, vigilant communication of this specific influence to important stakeholders namely financiers, banks along with credit rating agencies can prove to be critical (Hanlon et al. 2014).
Background to as well as reasonable alterations to the standards on leasing
The current methodology states that the primary objective of the present standard is to prescribe for different lessees as well as lessors, the suitable accounting procedures as well as disclosures to implement in association to particularly leases (Ball et al. 2015). This particular standard can be applied to each and every entity that is essential to both prepare as well as present financial assertions as per Part 2M.3 of particularly the Corporations Act and that is necessarily a reporting entity. In essence, the general purpose financial reports of each reporting entity and financial assertions that is or else considered to be general purpose financial reports. As suggested by Xu et al. (2017), this specific standard is applicable to yearly reporting periods starting on or else before January 1 of the year 2005. Also, this standard is said to be applicable to yearly reporting periods starting at January 1 of the year 2005. In essence, the necessities mentioned in these specific standards can be implemented to the pecuniary report in which information ensuing from application can be considered to be material as per the regulations of the directive AASB 1031 for particularly Materiality.
As rightly put forward by Laing and Perrin (2014), the standard can be implemented in accounting for different leases excluding leases for exploring for or else using different minerals, natural gas, specific oil as well as identical non-regenerative assets. Also, the scope of this current standard also explains the applicability of the same. This also includes licensing agreements for different items namely motion picture films, different plays, patents as well as copyrights. However, the current standard is not applicable based on measurements for particularly property that are held by lessees that is accounted for particularly as “investment property” (referring to AASB 140 for particularly Investment Property) (Joubert et al. 2017). In addition to this, there is also no applicability in case of biological assets delivered by the lessees (indicating towards AASB 141 for Agriculture).
As rightly indicated by Abbott and Tan?Kantor (2017), leases replacing the same with a single accounting model under which different lessees have the need to recognize diverse leases. In essence, this specific standard establishes principles for the purpose of recognition, dimension, presentation as well as disclosure of specifically leases. In essence, the current objective is to make certain that lessees along with lessors delivered pertinent information in a way that faithfully replicates these transactions. In essence, this information presents a basis for different users of particularly financial assertions to evaluate overall impact that leases have on particularly financial position and performance along with flows of cash of a specific entity.
Current Methodology for lease accounting
The business corporation can implement this specific regulation for leases, counting leases of appropriately rights of use resources in a sub lease, excluding
– Leases for exploring for or else utilizing minerals, gas, identical non-regenerative resources as well as natural gas (Dakis 2016)
– Leases of different biological resources within the purview of AASB 141 for particularly Agriculture possessed by a lessee
– Arrangements for concessions of service lying within the scope and purview of Interpretation 12 of particularly Service Concession Agreements
– Licenses of different intellectual properties are also granted by a particular lessor and that within the purview of the standard AASB 15 of particularly “Revenue from Contracts with Customers” (Xu et al. 2017)
– Rights possessed by a specific lessee operating under licensing arrangements that are present within the scope of particularly AASB 138 of particularly Intangible Assets for different items namely films and motion pictures, recordings of video, manuscripts, different copyrights as well as patents.
-A lessee might perhaps be implemented to particularly leases of varied intangible resources
As mentioned in the regulation stipulated under the directive AASB 116, for a specific contract that takes in a component of leases in addition to additional lease otherwise non-lease elements within the agreement as a lease individually (Joubert et al. 2017). Again, a lessee has the need to allocate diverse considerations in the agreements to each component of lease based on comparative stand alone prices of component of lease. The comparative stand alone price of a specific lease as well as non-lease element can be ascertained based on lessor prices or else similar supplier could also charge a specific entity for that specific component or else similar component. As a realistic measure, a lessee might perhaps elect, by using a class of diverse underlying resources. A lessee shall not implement any specific dimension to embedded derivatives that satisfy the requirements stated in the paragraph (AASB 9 for Financial Instruments) (Hanlon et al. 2014). Except the practical dimension mentioned in the paragraph 15 is implemented, a specific lessee will account for particularly non-lease elements implementing other appropriate standards.
The way in which accounting practices can alleviate concerns regarding alterations in brought about the new accounting standards. The novel standard is nevertheless more than just a change in accounting (Ball et al. 2015). As such, recognition of enhanced lease liabilities on particularly balance sheet statement is expected to concentrate more concentration on leases at particularly the Board as well as levels of management, counting deliberation of whether this leasing is the most effective ways of gathering access to different assets and deciding whether assets need to be purchased instead of being leased.
New methodology for lease accounting (lessee only)
The current accounting practices can help in alleviating concerns regarding alterations by considering the following:
– Influence on particularly gearing as well as covenants of loan (Wong et al. 2016)
– Influence of important financial ratios as well as communication of diverse stakeholders
– Influence on schemes of remuneration, counting bonuses as well as share based disbursements
-Subsistence of specifically data as well as systems to enumerate overall influence and satisfy different ongoing reporting requirements
In addition to this, this is not the lone important alteration in standards pf accounting that call for both consideration as well as application. The transition to AASB 16, a specific entity can have a number of different interdependent alternatives as well as practical dimensions that are available. The business wide influences including and not restricted to alterations can help management (Ferguson and Leech 2017). The rules concerning alteration can help in novel leasing systems for the purpose of capturing data as well as performing calculations. In addition to this, the influences can be managed by considering covenants of debt, rating of credit provided novel debt mentioned in balance sheet, tests of impairments as well as effects of tax provided enhancement in both assets as well as liabilities, procedures of substantiation of capex. For the current purpose of alleviation, management of the firm can institute a project team, comprehending lease portfolio, investigation of structural solutions to lessen influence, selection of transition alternative, gap evaluation of present systems, procedures as well as controls (Joubert et al. 2017). In addition to this, the steps also include ascertainment of future state design as well as implementation.
The present discussion deals with disclosure and method of communicating to the clients regarding the transition to the new leasing standard in the company. This requires proper disclosure to the clients of the company regarding the basic format and general principles of the process of investment, the portfolio and the changes that may impact the process of operation in the business materially (Ayob 2017). There must a reasonable judgement of the factors that might affect the transition and therefore must be communicated to the clients. The communication that might be effective can take place in the following steps:
Speech or panel discussion: The speech or the channel discussion deals with the conduct of the panel discussion that deals with the association of the clients and the management where the information is to be communicated. In the discussion the objective and the subject matter of the transition of the lease standard must be made aware to the clients.
Internet webcast or blog: This is the most convenient and easy method to convey the information to the clients. This requires a broadcast of the nature objectives and the consequence of the Transition of the lease standard with the help of internet and other social networking sites (Kwiatkowski 2017). This requires a formal short and relevant information communication to the clients and other stakeholders.
Face to face communication: This requires the primary process of word of mouth communication of the information by one to one interaction. Although this is a very long and a tedious process. This can be the most effective method of communication.
A newsletter to the prospective clients: This would help in the communication process to the respective clients by sending them letter individually with full disclosure of the pros and cons of the new adaptation and its objectives. This is again an lenghthy process but legally suitable and effective.
The organisation proposes to form a team that would enable to specialist team to help clients with the transition to the new standard. Since, the firm has a large number of clients who prepare general purpose financial statements. The AASB 117 Leases is due to be replaced in 2019 by AASB 16 and many clients are concerned about the potential impact of this new leasing accounting standard on their businesses. If the company forms a specialist team it will enable in the formation of a lobby for adapting change more effectively. The teamwork would include an increased efficiency which would help in the ability to focus on different minds on the same problem along with mutual support (Matthews and McLees 2015). However, there can be limitation in the formation of teamwork that may include unequal participation, longer process, and lack in creativity and conflict. Therefore after analysing the overall scenario it can be said that a team may be formed but it should be under supervision that would enable in overcoming the referred issue. As without the specialised team there would be a problem of understanding the new standard and implementation of the same (Lacerenza et al. 2018).
The organisation must be clear regarding the process of training of the staffs who are going to be trained and its procedure (Mone and London 2018). There must be individual analysis of the knowledge skills and abilities of the employees along with the process of adaptation and the process of dealing with the new lease standard. The development process must identify the activities and making a sound plan of action. There must be cost effective methods for training the employees and clear information regarding the lease standard must the given to the staffs at first then the technique in which they will handle the situations (Cascio 2018). The trainees must be given in proper incentives and effective easy tricks and methodology or efficient work. Then comes the process of training them in clearing the doubts and queries of the clients. At first the staffs must identify the query of the customers and their demand and facilitate various one to one and telephone session with the customers to give them a clear and effective feedback.
The new accounting standard of IFRS 16 lease that the company will adapt from 1 January 2019, will impact the movable and immovable assets for certain leases such as leases. As per the IFRS a lease may be classified as either an operating lease where the lessor transfers only the right to use the property to the lessee and not ownership or a finance lease where the lessee assumes some of the risks of ownership. In terms of the new lease accounting standard virtually all qualifying leases which are currently not reflected on the balance sheet of lessees will have to be reflected on the balance sheet. However this standard may be criticized for the reason that they significantly change balance sheet profiles of lessees which could make lessees look more leveraged than they actually are. This could lead to an increase in the cost of borrowing by lessees, it can also increase the cost and complexity of reporting especially in relation to leases relating to large volumes of small assets the balance sheet. However there are benefits of the lease standard as the new rules will ensure that the correct financial state of affairs of lessees will finally be reflected on their balance sheets and the lenders will be better informed about a lessee’s credit risk and will therefore be equipped to better understand and price the risk of lending to such a lessee.
Whilst it is too late to influence the initial new leasing standard your paper will help the partners form future lobbying positions on any further changes to lease accounting – Recommend whether the firm should have a separate “lobby” group to keep abreast of accounting standard developments and changes
The lobby that is to be created in the organisation in order to assist the clients of the company regarding the adaptation of the new lease standard is essential. The organisation proposes to form a team that would enable to specialist team to help clients with the transition to the new standard. Since, the firm has a large number of clients who prepare general purpose financial statements (Joubert, Garvie and Parle 2017). The AASB 117 Leases is due to be replaced in 2019 by AASB 16 and many clients are concerned about the potential impact of this new leasing accounting standard on their businesses. If the company forms a specialist team it will enable in the formation of a lobby for adapting change more effectively. The teamwork would include an increased efficiency which would help in the ability to focus on different minds on the same problem along with mutual support (Jong 2017). The lobby group would keep abreast of accounting standard developments and changes for the new standard for leases.
Conclusion
The new accounting standard of IFRS 16 lease that the company will adapt from 1 January 2019, will impact the movable and immovable assets for certain leases such as leases. The lobby that is to be created in the organisation in order to assist the clients of the company regarding the adaptation of the new lease standard is essential. The teamwork would include an increased efficiency which would help in the ability to focus on different minds on the same problem along with mutual support. The lobby group would keep abreast of accounting standard developments and changes for the new standard for leases.
Reference
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Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The Journal of New Business Ideas & Trends, 15(2), pp.1-11.
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