Exposure Draft 242 Lease Essay
Exposure Draft 242: Leases
Introduction
The Exposure Draft (ED) on leases is dissected to prove its ability to provide useful information to the user. This essay will firstly describe the objectives and the three key issues, which are lessee accounting, presentation of statements and disclosure. Secondly, it will analyse how the changes in new ED affect users and provides useful information in terms of those three issues. Lastly, a conclusion will be drawn to summarise and restate the topics.
Objectives and key issue of ED-242
The revised ED is aimed to improve the quality and comparability of financial reporting by providing a greater transparency about the leverage, the asset that an entity used in its operations, and the risk to which it is exposed from entering into lease transactions (AASB ED-242, 2013).
Lessee Accounting
The ED wants all leases to be recognised as right-of-use assets and lease liabilities, except short-term leases. AASB 117 only requires finance leases to be recognised on statements. This essay will focus on lessees and recognising operating leases on financial statements as the ED affects them the most.
Presentation of Statements
Financial statements will include more lines of items as a result of capitalising operating leases. Items include right-of-use-asset, lease liability, interest expense and amortisation. This ensures quantitative information is provided to decision makers.
Disclosures
Additional qualitative information such as descriptions of leases is to be included on statements due to the overwhelming complexity for users to understand elements such as how variable lease payments are determined. Enhanced disclosures will assist users to understand the additional information to be presented on statements.
Effects of ED-242
Recognising operating leases
Current situation
Operating leases are a way to avoid on-balance sheet debt to make financial statements look more appealing (Fülbier, Silva & Pferdehirt, 2006, p. 1). Beattie,
Introduction
The Exposure Draft (ED) on leases is dissected to prove its ability to provide useful information to the user. This essay will firstly describe the objectives and the three key issues, which are lessee accounting, presentation of statements and disclosure. Secondly, it will analyse how the changes in new ED affect users and provides useful information in terms of those three issues. Lastly, a conclusion will be drawn to summarise and restate the topics.
Objectives and key issue of ED-242
The revised ED is aimed to improve the quality and comparability of financial reporting by providing a greater transparency about the leverage, the asset that an entity used in its operations, and the risk to which it is exposed from entering into lease transactions (AASB ED-242, 2013).
Lessee Accounting
The ED wants all leases to be recognised as right-of-use assets and lease liabilities, except short-term leases. AASB 117 only requires finance leases to be recognised on statements. This essay will focus on lessees and recognising operating leases on financial statements as the ED affects them the most.
Presentation of Statements
Financial statements will include more lines of items as a result of capitalising operating leases. Items include right-of-use-asset, lease liability, interest expense and amortisation. This ensures quantitative information is provided to decision makers.
Disclosures
Additional qualitative information such as descriptions of leases is to be included on statements due to the overwhelming complexity for users to understand elements such as how variable lease payments are determined. Enhanced disclosures will assist users to understand the additional information to be presented on statements.
Effects of ED-242
Recognising operating leases
Current situation
Operating leases are a way to avoid on-balance sheet debt to make financial statements look more appealing (Fülbier, Silva & Pferdehirt, 2006, p. 1). Beattie,
References: Australian Accounting Standards Board (2013) 'AASB Exposure Draft 242 Leases ' (viewed 29 September 2013) Beattie, V., Goodacre, A Beattie, V., Goodacre, A. & Thomson, S. (2006) 'International lease-accounting reform and economic consequences: The views of U.K. users and preparers ', The International Journal of Accounting, Vol. 41, Issue 1, p. 82 (viewed 25 October 2013) Bennett, B.K Bostwick, E.D., Fahnestock, R.T. & O’Keefe, W.T. (2013) ‘Effects of lease capitalization techniques on key measures of financial performance’, Journal of Finance and Accountancy, Vol. 12, pp. 91-102 (viewed 10 October 2013) DeVilliers, R Duke, J.C., Hsieh, S.& Su, Y. (2009) 'Operating and synthetic leases: Exploiting financial benefits in the post-Enron era ', Advances in Accounting, Vol. 25, Issue 1, pp. 28-39 (viewed October 2013) Durocher, S Fülbier, R.U., Silva, J.L. & Pherdehirt, M.H. (2006) ‘Impact of lease capitalization on financial ratios of listed German companies’, Working paper, pp. 1-29 (viewed 10 October 2013) ImhoffJr, E., Lipe, R Tai, B.Y. (2013) 'Constructive Capitalization of Operating Leases in the Hong Kong Fast-Food Industry ', International Journal of Accounting & Financial Reporting, Vol. 3, Issue 1, pp. 128-140 (viewed 21 October 2013)