The term financial lease refers to the grant of property for a certain period, which includes assets like property plant and equipment, machinery and other assets for the operations of the company. A lease is defined as a rental agreement between two parties for renting out an asset. The AASB 16 defines all assets and liabilities of the company by identifying the entire lease. More particularly, it is a business arrangement where there is there is the lessee who is the client or borrower will have to choose an asset that may include any kind of vehicle, equipment or software and there exists the lessor who actually is the financial organization who will buy asset. In this mechanism the lessor will have the utilization of that asset during the period of lease. He will have to pay a range of installments or rent for the utilization of that asset. The lessor will get back a substantial part or the majority of the cost of the asset in addition to interest from the rentals paid by the lessee. The lessee has the choice to obtain asset ownership by paying the last rental, making a bargain with the price of purchase (Bohušová, 2015).
A Financial lease has monetary features with the system of higher purchase systems and the mechanism of close-end leasing. The optimal result in the whole procedure is that the lessee will turn into the asset proprietor at the end of the lease agreement or contract. However, there are various implications of tax and accounting treatment for this. There may be tax benefits for the lessee to lease an asset rather than purchase it and this may be the motivation to obtain a finance lease (Wong & Joshi, 2015).
At present, there are numerous businesses that go into these lease agreements in light of the fact that the organization does not have to bear the price of financing the business assets. In this manner, the financial lease and the operating lease are getting more prevalent. The benefit of the same with comparison to other favorable circumstances of this arrangement of lease is that the interest charges and depreciation that are in nature tax deductible, thus they are allowable as deduction. Thus, the installments of lease are additionally tax deductible if there is the occurrence of the operating lease and subsequently they are permitted as deduction. The lease arrangement in which the risk and rewards are exchanged with the exchange of a benefit is known as Finance Lease. The lease arrangement in which the risk and rewards are not exchanged with the exchange of the asset is known as Operating Lease. Finance Lease is a kind of loan arrangement in which the lessor assumes the part of lender. In case of the Operating Lease, this is also similar to a rental agreement.
The finance Lease is for the long term as it covers the most extreme piece of the life of the benefit. Dissimilar to, Operating Lease, this is for a shorter period. An Operating lease is more adaptable when contrasted with the Finance Lease. In the back rent, the responsibility for resource is exchanged to the resident toward the finish of the rent term, by paying an ostensible sum which is equivalent to the equitable estimation of the benefit. Then again, in working lease, there is no such sort of alternative. In Finance Lease, the renter bears the danger of out of date quality though in Operating Lease the lessor bears the hazard for so. Any cost for repairs and upkeep will be borne by the renter in the fund rent, however the cost of repairs and support will be borne by the lessor in working lease.
The finance Lease is for the long term as it covers the most extreme piece of the life of the benefit. Dissimilar to, Operating Lease, this is for a shorter period. An Operating lease is more adaptable when contrasted with the Finance Lease. In the back rent, the responsibility for resource is exchanged to the resident toward the finish of the rent term, by paying an ostensible sum which is equivalent to the equitable estimation of the benefit. Then again, in working lease, there is no such sort of alternative. In Finance Lease, the renter bears the danger of out of date quality though in Operating Lease the lessor bears the hazard for so. Any cost for repairs and upkeep will be borne by the renter in the fund rent, however the cost of repairs and support will be borne by the lessor in working lease (Xu, Davidson & Cheong, 2017).
`The JB Hi-Fi Company operates as the Australian retailer in the wide variety of consumer and electronic goods such as video games, DVD, CD, electronic hardware’s, mobile phones and other electronic products. The company is having a wide variety of products dispersed in the electronic and hardware products. The company has sufficient amount allocated in the research and development of such products and updating the same with changing time and preferences of the consumers. The plant and equipment and the leasehold improvement of the company is around 8.49% which has decreased consistently from the last year 2016 when it was around 18.50%. The major non-current assets of the company is the plant and equipment of the company in the year 2016 but from the year 2017 the company had a greater asset base of intangible assets in the non-current assets of the company.
The plant and equipment and the leasehold improvements of the company are stated at a net value, which includes the cost price less accumulated depreciation. The company has made provision for the lease in two broad categories the current portion of lease is around $ 4.9 million in the year 2017. The current portion of the lease has considerably increased from the last year when it was $ 2 million dollars, which shows that the company is using the current assets of the company in the lease format. The non-current asset or the non-current lease of the company is around $4.5 million in the year 2017, which has increased from the last year of $ 1.5 million. The lease provisions for the company is made on the basis of company estimate of the amount required for paying of the lease and by looking at the past trend of such lease contract done (Barone, Birt& Moya, 2014).
The company classifies majority of its lease contract as an operating lease in which the risk and reward and title ownership is not transferred to the company. Payments and expenses related to such operating leases are identified in the income statement of the company. The expenses are charged in the profit loss account in the lease period. From the financials, statement of the company the lease structure of the company is volatile as the lease accrual is rising where the current lease accrual for the company rose from $ 2 million in the year 2016 to $ 2.9 million dollars in the year 2017. The lease accrual for the company represent the difference of amount between the actual payment due and the lease due for the year. The non-current lease accruals also has increased by about 28.69% from 11.5 million dollars to 14.8 million dollars in the year 2016-2017. The lease incentive for the company which if it gets while entering an operating lease is recognized as an liability in the financial statement of the company. Lease incentive is a grant period given to the company over the lease term. The aggregate benefits arising from such lease incentive is recognized as a reduction in the lease payment of the company on a straight-line basis over the term period of lease (Nuryani, Heng &Juliesta, 2015).
The lease structure of the company is such where all leases are defined as operating lease while with the applicability of new accounting standards the company would have to classify all the operating lease of the company as a financing lease. The company would have no further benefits in interest charge as a tax-deductible source it used to avail. The ownership transfer of risk and reward and title of the assets gets transferred from the lessor to the lessee in such cases. The financial ratio for the companies might also get affected total assets turnover ratio for the company will further increase more(Morales-Díaz & Zamora-Ramírez, 2018).
The article which is presented in the question shows that about 50% of the organizations are using US GAAP Framework or IFRS framework for the purpose of accounting for leases of the business. As indicated by the article, most of the business which fall under the US GAAP and IFRS Framework are showing leased assets in the annual reports which is nearly about $ 3.3 million out of which 85% of the are not appropriately disclosed in the balance sheet of the business as the same are covered within the scope of operating leases of a business(Lightner et al., 2013). Therefore, most of the leases balances was not covered in the financial statements and therefore the author is of the opinion that past accounting standard did not reflect economic reality of the financial information.
The treatment which was adopted by business as per the past accounting standard, 85% of the leases amount was not shown in the financial statements of the business. This is due to the presence of operating leases in the annual reports of such businesses(Chambers, Dooley & Finger, 2015). The operating lease though not shown in the annual reports of the business create actual liabilities for the business. This is one of the main reason due to which the companies which are small in nature are unable to meet up the liabilities in times of financial crisis. Moreover, the organization has significant amount of commitments in relation of long term operating leases which further increases the debt values of the business(Bloom &Kamm, 2014). Hence it can be said that lease liability in an organization under the off-balance sheet arrangements has been 66 times higher in contrast to debt value which is shown in the annual report of the business.
The past accounting system in relation to lease accounting can lead to issues in comparability of the financial information which is shown in the annual report of the business. In the aviation sector majority of the leases which are used are operating in nature and therefore appropriate presentation of the financial statements are not made in connection to such a business. Therefore, an aircraft organization which is engaged in leasing of aircraft will have a different position in financial terms in comparison to an aircraft business purchasing aircrafts, however the financial obligations are different for both these businesses(Kusano, Sakuma &Tsunogaya, 2016). Therefore, it can be said that the playing field for aircraft business are not on similar grounds. The introduction of the new standard in lease standard will bring about changes in reporting framework and thereby improve the accounting for leases.
The accounting standard change in lease will be affecting most of the organization which are dependent on leases. Such changes are expected not to be popular among businesses. The Chairmen is of the opinion that the changes in lease accounting will lead to controversies. The changes are also expected to bring about commercial impact on the business.
Reference
Barone, E., Birt, J., & Moya, S. (2014). Lease accounting: A review of recent literature. Accounting in Europe, 11(1), 35-54.
Bloom, R., &Kamm, J. (2014). Revenue recognition: how we got here and where it will take us. Financial Executive, 30(3), 48-53.
Bohušová, H. (2015). Is Capitalization of Operating Lease Way to Increase of Comparability of Financial Statements Prepared in Accordance with IFRS and US GAAP?.Acta UniversitatisAgriculturae et SilviculturaeMendelianaeBrunensis, 63(2), 507-514.
Chambers, D., Dooley, J., & Finger, C. A. (2015). Preparing for the looming changes in lease accounting. The CPA Journal, 85(1), 38.
Edeigba, J., &Amenkhienan, F. (2017). The Influence of IFRS Adoption on Corporate Transparency and Accountability: Evidence from New Zealand. Australasian Accounting, Business and Finance Journal, 11(3), 3-19.
Kusano, M., Sakuma, Y., &Tsunogaya, N. (2016). Economic consequences of changes in the lease accounting standard: Evidence from Japan. Journal of Contemporary Accounting & Economics, 12(1), 73-88.
Lightner, K. M., Bosco, B., DeBoskey, D. G., & Lightner, S. M. (2013). A better approach to lease accounting: Fixing the shortcomings of the proposed rules. The CPA Journal, 83(9), 14.
Morales-Díaz, J., & Zamora-Ramírez, C. (2018). The Impact of IFRS 16 on Key Financial Ratios: A New Methodological Approach. Accounting in Europe, 15(1), 105-133.
Nuryani, N., Heng, T. T., &Juliesta, N. (2015). Capitalization of Operating Lease and Its Impact on Firm’s Financial Ratios. Procedia-Social and Behavioral Sciences, 211, 268-276
Wong, K., & Joshi, M. (2015). The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting, Business and Finance Journal, 9(3), 27-44.
Xu, W., Davidson, R. A., & Cheong, C. S. (2017). Converting financial statements: operating to capitalised leases. Pacific Accounting Review, 29(1), 34-54.
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