Discuss about the Accounting Standards Setting Board.
The Australian Accounting Standards Setting board, AASB 16 made changes to their lease accounting, which will have an extensive impact on the financial statements of lessees on many organizations. According to the new standards, they require lessees to account for the leases on balance sheet and a right of use assets and a lease liability (Troy, 2008).
Changes made by the new leasing standards
This new standard will have a large impact on many firms on their financial statements of lessees of property and their most valuable assets. Leases of low value assets and short-terms leases will reduce the impact for many businesses. Companies in the Travel and leisure industry will experience major change in their reported profits and some major changes on their balance sheets. If the company had, loans the management needs to revise the terms of the agreement since the financial changes with greatly affect the agreement. The company is likely to breach the contract and it would be wise to contact the lender before the changes take full effect on 1 January 2019 (PRATT, 2011).
The new current standard distinguishes between the operation and finance leases depending on the amount payable and duration. In the older standard, finance leases recognized an asset and a liability but the operating leases were not recognized in the balance sheet but considered as an expense over the duration of the lease agreement. Currently, property lease is only disclosed in the notes to the accounts but does not recognize any liabilities or assets. In new standard, all leases are treated the same and it just the same as the current finance lease where a firm that has the rights to use the asset and the liability will have to recognize them .This represents their obligation to pay for the assets. A leisure and tourism company that presently lease hotels in the new standard they will find themselves recognizing their interest in the hotel as assets in the balance sheet and record a liability for their future payments.
Under the new rules, the charges will comprise of two elements, which include the interest charged from financing and the depreciations of the building. The depreciations will not change much but the interest charges will be determined by the lease period. Operating cash flow will continue increasing while the cash flows in the operating outflows documented as finance attributes.
B)
Impacts of the new standards to the stakeholders
Effects of AASB16 to the stakeholders.
Drafting the lease agreement under the new standards as an operating lease, will not affect the net assets reported but due to the large size of property leases, it may affect the gross assets and liabilities. The total debt will be slightly higher than in the previous standards. The firms with loans agreement due to the increase in debt levels according to the new standards will have to renew the contract due to the changes made. The stakeholders divided in the hotel and other leisure companies will reduce due to the effect of the new standards brought about by the reduction of profits margins. This change may not affect all firms since the firms have different leases. The operating leases spreading over their lifetime will minimize changes (PRATT, 2011).
This will reduce the negative view of the company by the AASB16.The stakeholder will benefit from the new standards of lease since the information on how to use the corporate bond rates to discount long term employees. The employees in the public sector will use the government bond rate to discounts their stakeholders.
Effects of AASB16 to the stakeholders income statement, balance sheet, and the cash flow statement.
The AASB16 new rules will affect all the financial ratios such as the current ratio, net income, balance sheet, operating profits, interest turnover, and the cash flow statements. The changes will also affect the credit rating, borrowing cost, and loan contracts. The gearing ratios and the figures in the balance sheet will grow but the capital ratio will decrease. In the balance sheet, the interest will replace the expenses such as rent while the depreciation expense increases. In the income statement, the reported profits will reduce due to the recognition of the assets and the liabilities in the lease agreement. In the income statement, the restoration and the direct costs are incorporated in the new leases. The firms profit will reduce due to the recognition of lease liability where the firm leasing the property will be required to make the lease payment that represents the obligation to pay. The recognition of the lease expense in the income statement will reduce the net profit for the lessee (Gibson, 2009).
The lessee are obligated to produce present lease liabilities independently from the other liabilities on the balance sheet or reveal separately in the notes while in the income statement they must show interest expense on the lease liability distinctly from the depreciation charge for the right-of-use assets (Troy, 2008). In the statement of cash flow, location of the cash payments for the primary portion of the lease liability is found in the financing activities, cash payments for the interest portion of the liability are presented within the financial activities or the operating activities.
Benefits and the impact of the report to the users
The lease obligation is identical to an essential and interest credit. In the early years, there was a critical loan balance, a bigger extent of the installment in the interest cost .In the later years, there is a littler loan balance, and a greater amount of the installment is reimbursement of capital (diminishing balance sheet liabilities). Users may have a substantial arrangement of leases with contrasting renewal and expiry dates. A portfolio impact may diminish the pay articulation unpredictability from the new standard yet the planning of huge recharges may at present cause variability in costs every year. The new bookkeeping treatment will instantly influence a scope of key measurements observed by partners, including net obligation and outfitting, EBITDA, EBIT and PBT.Net obligation and adapting Will increment in light of the fact that reported obligation increments yet the resources will be excluded .EBITDA Will increment on the grounds that there will be no working lease cost included. PBT While PBT for the lease general will be impartial; benefit will be lower in the underlying part of a lease because of the higher interest segment of the installments. The effect on every metric will be less sure in future periods, as it will change in light of the arrangement of leases and recharges. At the point when key leases, or countless with comparable close dates, are restored, there will be a huge increment in the obligation on accounting report overnight and expanded interest cost in the next years. Users should precisely deal with their lease reestablishments and gauge lease positions so they can discuss plainly with partners and set business sector desires (BRAGG, 2013).
The new bookkeeping treatment will have more extensive consequences that include; Debt pledges even though numerous obligation understandings have statements about changes in maybe bookkeeping benchmarks, the pledges at present ought to be renegotiated or computations arranged on both bases. AASB Spotlight Share based installment measurements Performance obstacles may should be renegotiated. Profit strategy the updated profile of salary proclamation costs and a possible initial value modification may affect profit planning. Thin capitalization the progressions to net obligation will influence dainty capitalization figuring and could influence the assessment deductibility of interest. Lease transactions while bookkeeping ought not to be the key driver in business lease arrangements, if tenants are hoping to relieve asset report impacts, they may consider lease terms and the structure of lease incentives (Troy, 2008).
When ascertaining the lease risk, users should consider the accompanying areas: Contingent rent ( turnover-based) users should determine whether unexpected rent is in substance settled renewal or buy choices. Some business sector estimated restoration choices might be incorporated into the lease obligation; for example, leases for point of interest properties or where critical redid fit out has been attempted Bundled administrations ( cleaning or security) packaged administrations can be part out and barred from the lease risk however this may require more data and estimation. Users may need to set up different estimations: reported figuring for agreements, new counts for money related reporting.
The AASB16 will affect the firms with big assets since they are obligated to declare the assets and the liabilities in the lease agreement. The company’s profit will decrease due to the recognition of lease liability where the firm leasing the property will be required to make the lease payment that represents the obligation to pay. The recognition of the lease expense in the income statement will reduce the net profit for the lessee .There will be a huge managerial weight for users in catching the majority of the data required to ascertain the lease risk and required revelations, even with the exceptions for fleeting leases or little resources. Lease assertions have different mind boggling and interrelated components that should be broke down over the arrangement of leases. Although the new standard is not material until 2019, a point-by-point investigation of its effects is recommended now to settle on educated choices. All things considered, most organizations will go into and recharge contracts reaching out into 2019 and past, both for leases themselves and contracts influenced by money related key execution markers, for example, credit offices and offer based installments courses of action (Gibson, 2009).
References
PRATT, J. (2011). Financial accounting in an economic context. [Hoboken, NJ], Wiley.
Troy, L. (2008). Almanac of business and industrial financial ratios. Chicago, IL: CCH pg.106
Leach, R. (2010). Ratios made simple: A beginner’s guide to the key financial ratios. Peters field, Hampshire: Harriman House pg. 67.
DELANEY, P. R., & WHITTINGTON, R. (2005). Wiley CPA exam review. Hoboken, NJ, Wiley.
Gibson, C. H. (2009). Financial reporting & analysis: Using financial accounting information. Mason, OH: Southwestern Cengage Learning pg.11
Bull, R. (2008). Financial ratios: How to use financial ratios to maximize value and success for your business. Amsterdam: Elsevier/CIMA Pub.
LOUGHRAN, M. (2011). Financial accounting for dummies. Hoboken, N.J., John Wiley & Sons.
BRAGG, S. M. (2013). Accounting policies and procedures manual: a blueprint for running an effective and efficient department. Hoboken, N.J., Wiley. Pg.78
Albrecht, W. S. (2007). Accounting, concepts, & applications. Mason, Ohio: Thomson/South-Western.
Duchac, J. E., Warren, C. S., & Reeve, J. M. (2011). Accounting using Excel for success. Mason, Ohio: South-Western.
A dictionary of accounting. (2010). Oxford: Oxford University Press.
Simanovsky, S. (2010). Accounting for beginners. Grandville, MI: Global Finance School.
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