Accounting theory Assignment Help

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Accounting theory Assignment Help




The report states the purpose of the requirement of modification of the previous accounting standard for the leases to the current lease (AASB 117 to AASB 16). The report describes the shortcomings that led to the necessity of such modification. The requirement of the positive accounting theory in terms of the managerial perspective is also well attended in the report. The report caters to the modification that the companies similar to Accent Group Limited required to implement for the transition of the standard. The report also gives an overview of IASB with relevant examples. The report also states the actions taken by Accent Group Company due to the transition of the accounting standards 

1. Introduction

The report aims at the understanding and analyzing critically the Lease Accounting Standard. The fresh Financial Accounting Standard for lease AASB 16 has been critically examined in the report. The report also critically evaluates the traditional Lease Accounting Standard (AASB 117) highlighting specifically the shortcomings of the lease standard. The reason for the change being mandatory has also been well attended in the report. The report also caters to the changes that have been modified in the fresh Lease Accounting Standard for ASSB 16. The view of the IASB for the incorporation of IFRS 16 which is supposed to enhance the comparison between the companies which borrows to purchase assets and the companies which lease assets has been explained. The report also casts the provision and effect of the transition of AASB 117 to AASB 16 taking the example of a company named Accent Group Limited.

2 Evaluate Critically the pervious lease accounting standard (AASB117) highlighting specifically the shortcoming

As per the findings, it is evident that the previous lease accounting standard (AASB 117) fell short of classifying the finance or the operating as well as the lease itself. It has also been found that if the classification of the lease included the operating structure yet the previous accounting standard fell short of the asset or the liability within the balance sheets. The previous accounting standard has been found to provide only the lease payments that included the expense in loss or profit. It has been checked that the operations related to the accounting of lease require many complex scenarios that needed to be handled which the previous lease standard failed. Therefore, the lease standard proves itself to be incapable of consideration in financial accounting purposes. Moreover, it was found that some of the operating leases could not be cancelled which proved to become a liability for the renter (Aasb.gov.au, 2019). The cancellation of irrelevant or rather less important operating leases are required to be included within the accounting standard for the lease (AASB 117) but it failed to meet the requirement.

It has also been found that the liabilities of the statements based on finance were concealed from its readers which led to the breach of transparency. The breach in the transparency of the financial statements definitely failed to keep the requirement of the people. It has also been observed that few disclosures within the notes of the statements of finance proved its necessity but to dismay, the notes were not read by the people other than the auditors (Aasb.gov.au, 2019). The lease for the accounting standard (AASB 117) included the notes that were of less importance to common readers except the auditors thus it failed to keep up to the expectations of the mass people. Therefore, the previous accounting standard for the lease (AASB 117) faced the aforesaid shortcomings.

The change being mandatory

The previous accounting standard for the lease (AASB 117) required following the transition phase due to the following reasons as mentioned below:

  Failed to classify the lease: The previous accounting standard for the lease (AASB 117) failed to classify the lease and distinguish between the finance lease and the operating lease. This proved to be very difficult not only for the auditors but also for the companies for their lease contracts (Hlb.com.au, 2019). This required to be modified based on the requirements of the users who were basically the auditors, the companies and the common people.

  Lessees did not list the asset or liability in the balance sheets of the operating leases: It has been reckoned that the lessees did not list the assets or the liabilities for the operating leases within the balance sheets. They only listed the payments of the lease that included the loss or profit (Ifrsbox.com, 2019). This proved to be difficult in understanding during the audit and thus required to be changed or modified.

 Operating Leases could not be cancelled: The operating leases could not be cancelled that proved to become the liability for the lessees. This proved to become tough for the lessees to perform financial operations in the fear of getting liable for the operating leases that were of less importance (Hlb.com.au, 2019). Thus, this required to be changed or modified as per the requirement of the lessees.

Liabilities remained opaque: The liabilities were not transparent for the readers of the statements related to the finance due to the fact that the liabilities did not require its presentation anywhere. This lead to the breach of transparency which was mandatory to be altered and thus arose the need for a new accounting standard required the replacement that excluded such kind of breaches (Deloitte.com, 2019).

 Included notes related to the financial statements that were not read by the lessees: The previous accounting standard for the lease (AASB 117) included notes related to the statements for finance that were only read by the auditors. This led to the fact that the disclosure of notes proved to be of less importance and can be illustrated elsewhere (Ifrsbox.com, 2019).

According to the above reasons, the previous accounting standard for the lease (AASB 117) required alteration and the changes were done in the new accounting standard for the lease (AASB 16).

4. Changes that have been implemented wirhin the freh accountig standard lease AASB  16

The changes that have been implemented in the fresh accounting standard for the lease (AASB 16) can be illustrated as:

  Lease contract: As per the fresh accounting standard for the lease (AASB 16), it deals with the accounting of the contracts similar to that of the AASB 117 but it requires an extreme carefulness while dealing with it. This is due to the fact that the fresh accounting standard came up with an explained guidance for determining whether the contract is a service or a lease contract.

 Lessees account for leases: It has been found that the lessees do not require illustrating the lease during the start and thus determining whether it is related to operating or financing. The reason behind the cause is due to the fact that the fresh accounting standard for the lease (AASB 16) advises every lessee of a single model for the accounting of each lease (Iasplus.com, 2019).. The two types of exceptions that differ the AASB 16 and the AASB 117 (financial leases) are:

    The lease for the assets is of short-term which is below the tenure of 12 months.

    The lease for the assets is of a lower value similar to that of the furniture, computers and so on.

    The changes that were made in the fresh accounting standards (AASB 16) were mandatory and         included the aspects that the previous accounting standard (AASB 117) failed.

The way by which the companies will be affected by the change if the lease

The change of the lease contract from AASB 117 to AASB 16 is likely to lay impact to few extents on every kind of business of the companies. The vital aspect that was included in the fresh accounting standard is the fact of being prepared and proactive. The fresh accounting standard included the costs that were related to the leased asset and also the related benefits on the balance sheet of the business (Iasplus.com, 2019). Previously, it was noted that the traditional accounting standard failed to list the assets or the liabilities and only included the lease payments in terms of the loss or the profits.

The fresh accounting standard AASB 16 is modified that represents the financial position of the business more accurately. The representation includes all the liabilities of the business and thus provides more relevant data in the financial reporting for the shareholders and the investors. It is expected that the balance sheets of the companies are to be modified and thus the companies require explaining the shareholders, financiers and the investors for the purpose (Iasplus.com, 2019). Moreover, the change will lead to the integration with the business departments and lead it to function the financial reporting and enter into agreements of the lease.

6.1puroose of the companies to classify maximum lease contract as the  lease whereas the finance lease ewas also being allowed

The operating lease deals mainly with the renting of the assets which means the payments of the lease are treated in terms of operating expenses and that the asset is not listed in the balance sheet. On the other hand, the financial lease deals mainly with the loans that are given where the ownership of the asset is taken into consideration by the renter. For this reason, the asset gets listed on the balance sheets of the company (Iasplus.com, 2019). However, it has been observed that most of the company’s preferred to classify the maximum lease contract as the operating lease due to certain advantages.

It was found that the operational lease helped in influencing the rise in the capital of the company as well as eliminates the concept of deposits including the prepayments. Thus, according to the above explanation, it can be affirmed that with the implementation of the operating leases the lesser can account for the assets properly. Similarly, it has been found that the operating lease helps a lessee to be eligible for the tax loans which is similar to the rental price inclusive of the other expenses. It has been observed that this advantage helps to lay a positive impact over the investor for the purpose of optimizing, controlling and planning the expenses (Ifrsbox.com, 2019). The expenses are planned, optimized and controlled through the monthly installments that are fixed and of long-term. Moreover, it has also been found that the operating lease helps to reduce the amount of the paperwork of the companies which positively impacts the company as it helps to easily track the records. Moreover, it has also been found that the operating lease helps to account the monthly installments as the company’s expenses.

6.2 the behavior of managers based on the positive accountig therory

 positive accounting theory deals in making proper predictions of the events of the real world and converts them to the accounting transactions. The positive accounting theory helps to make an understanding of the prediction and the explanation related to various actions which are based on accounting. The various actions related to the accounting theories are similar to the accounting policies and the accounting standards that are proposed (Hall, 2016). Moreover, it has been found that Positive Accounting Theory deals with the recognition of the existence of the economic consequences integrated with the prediction of choice for the respective accounting policies. The PAT theory has been found to deal with mainly three types of relevant hypothesis like

     Political Cost

     Debt covenant

     Bonus Plan

According to the PAT theory, it can be well understood that the theory deals with the change of the policies with respect to the alterations in the real-life scenarios. Thus, the implementation of this theory by the managers helps to adjust to the changing scenarios through the planning of a relevant accounting policy (Boiral, 2016). Moreover, it has also been found that PAT theory supports the operating lease that helps a company to be provided with cost flexibility.

Expalain the overview of IASB with relevant exa,ple

cording to the IASB, the prime purpose that led to the implementation of AASB 16 was due to the fact that the board tried to improve the compatibilities among the companies. It was reckoned that the IFRS 16 helps to give a more reliable presentation of the liabilities and the assets of the company in terms of high transparency depending upon the company’s financial advantage. The improvement comparability lies mainly within the hands of the investors that can be provided as the best example. In respect to an example, the amount noted on the balance sheet of the renter along with the income statement can be adjusted based on the will of the investors and the analysts. Another example that can be provided with respect to the implementation of IFRS 16 is based on the information of non-GAAP providence about leases. The implementation of IFRS 16 can help in laying a proper view over the context and thus help in the implementation of the organisational operation.

The implementation of the AASB 16 helps as per the view of the IAFB lies in the aspects such as the cost borrowing and the debt covenants. The transition of the AASB accounting standard did not lay much impact on the economic position of the company as well as it also did not affect much on the pay cash that is considered typically by the lenders. As per the IAFB, the implementation of the IFRS 16 proves to provide with the best results in the cost borrowing and thus, helps to improve the decision-making process. The improvement of the decision-making process helps in gaining transparency of the company’s finance.

Giv a probable explanation for the reporting entities to procure more assets and lease after the incorpoation of AA SB 16

he effect of the implementation of AASB 16 proves to lay an impact in the leasing market that led the companies to purchase more assets and lease fewer assets. This is due to the following reasons:

     Balance sheets: The implementation of the AASB 16 requires to include the leases on the balance sheets excluding the short-term and low-valued leases that increases the financial liabilities and the lease assets. The companies thus find it tough to lease assets and this prime reason for them to procure for more assets (Companydirectors.com.au, 2019).

     Cash-flow statement: The implementation of AASB 16 included the terms for the disclosure of the principal payments in respect of the lease payments which is supposed to become a part of the financial activities. The companies find it beneficial to procure more assets over leasing assets due to the above-said reason.

     Income Statement: The rental expenses are supposed to be substituted with a depreciation cost on the lease assets. The implementation of the AASB 16 also included financial costs in regard to the component of interest of the lease liabilities (Companydirectors.com.au, 2019). The companies found it to be advantageous in investing revenues for the purchase of the assets rather than leasing the assets.


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