CO5123 Advance Issues Of Accounting

There is a word limit of 2,000 words excluding abstract, appendices and reference list. Your essay must contain an ‘Abstract’. Whilst this is usually not the normal requirement for an essay, it is a skill worth developing.

APA referencing is to be used. (See additional material provided in this regard).

The essay should be: o Typed o Spacing at 1.5 lines o Times New Roman is to be used o Font size is 10. Essay topic: Accounting for Leases – the impact of AASB (IFRS) 16 You are required to write an essay to demonstrate your understanding of accounting for leases. With reference to the most recent annual report of a Not for Profit (“NFP”) organisation ( such as Ozcare, St. Vincent de Paul society QLD, UnitingCare and so on) write an essay which examines accounting for leases, and the major expected changes that will come about with the application of the new leasing standard. Your essay must include: • Evidence of your understanding of lease arrangements and the impact on financial reports, including a demonstration of operating versus financial leases.

Summarise the NFP you have chosen, including the value of leases as currently listed in the financial reports.

Research on the impact that the accounting rules for leases might have on the NFP you have chosen.

A summary of the short- and long-term impacts of the changes to reporting for leases (e.g. financial statements and gearing ratios).

You should also be able to demonstrate your understanding of lease arrangements for the industry of your NFP and the lifecycle and stage of the lease. Topic: Accounting for Leases – the impact of AASB (IFRS) 16 The bottom line on leasing under IFRS 16 IFRS 16, the new accounting standard on leases (AASB 16 Leases in Australia), will bring trillions onto balance sheets globally but putting it into practice has thrown up some complexities. The International Accounting Standards Board (IASB) estimates that more than US$2 trillion in leased assets is left off the balance sheets of listed companies applying International (IFRS) or US generally accepted accounting principles (GAAP). That’s a lot of company assets and liabilities sitting off-balance sheet, potentially undermining the transparency of those businesses. That’s all about to change when IFRS 16 Leases (AASB 16 Leases in Australia), the new accounting standard for leases, comes into effect. After more than a decade in development, this new accounting standard – which will operate from 1 January 2019 – will essentially eliminate the accounting distinction between finance and operating leases, bringing previously off-balance sheet arrangements onto the balance sheet. Under the new standard, future operating lease payments will be capitalised and included on the balance sheet as a right-of-use (ROU) lease asset and a corresponding lease liability. The asset will then be subject to depreciation, while interest will be recognised on the lease liability over the lease term. A number of practical implementation challenges have been identified with the new standard. For example, variations arising from Consumer Price Index (CPI) increases could require re-measurement of the lease asset/liability in subsequent periods. Other considerations surround the impact of IFRS 16 on novated lease contracts, and peppercorn leases. Peppercorn leases are where the lease payments do not reflect the fair value of the property being leased, and are not uncommon in the public and not-for-profit sectors. The balance sheet and the bottom line Once recognised, the new interest expense and depreciation charge will in fact be higher than the periodic lease rentals at the start of the lease term; it’s a phenomenon known as the financing effect. “The accounting will affect profit and loss, with depreciation and interest expense instead of lease payments,” says David Hardidge, director – technical and treasury products at the Queensland Audit Office. The direct effect is that net profit will be lower in the earlier stages of the lease term, thanks to higher interest payable on a larger liability. As the liability is paid, the lease payments remain unchanged but the interest element will start to reduce, as will its impact on the bottom line. The changes will also affect other ratios such as earnings before interest and tax (EBIT) and earnings before interest, tax, depreciation and amortisation (EBITDA). “Your profit will be affected by the financing effect, even if your underlying results stay the same,” says Hardidge. Even though you will have higher accounting expenses at the start of the lease, this does not mean higher tax deductions. The deductibility of lease rentals will be governed by the local tax legislation, which may not change. Differences between accounting and tax treatments will require tax effect accounting adjustments. “The accounting will affect profit and loss, with depreciation and interest expense instead of lease payments.” David Hardidge FCPA, Queensland Audit Office The challenge will be working out the interest or discount rate and, therefore, the interest element of the lease rental payment. That may be implicit in the lease, though more likely it will not be able to be determined and you will have to use an incremental borrowing rate. ROU assets will generally be reported under the applicable property plant and equipment (PPE) class, although there is likely to be a further note to the financial statements that differentiates leased and owned assets. The revaluation of these new ROU assets for financial reporting purposes is also allowed under IFRS 16, but only if the related class of assets is revalued. On the flip side, if for example you revalue buildings you own, it seems there’s no corresponding need to revalue leased buildings. It’s an added consideration for the financial reporting team. As with most new accounting standards, there’s an option to apply IFRS 16 retrospectively and include balance sheet comparatives. However, IFRS 16 also offers a modified retrospective approach that doesn’t require restatement of comparatives. At the time of adopting the standard, any lease liability is simply based on future rentals for the lease term, discounted to reflect its present value. The scope of the modified approach, which allows a choice of how the lease asset is calculated (a decision that will affect future profits), is limited. Entities with a 30 June year-end must recognise assets based on the new rules from 1 July 2019.



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