Upcoming Contribution And Leasing Standards †Myassignmenthelp.Com

Question: Discuss About The Upcoming Contribution And Leasing Standards? Answer: Introduction Lease is a special contract or agreement in which the lessees has to pay the lessor for the use of his/her assets for a specific period of time. Thus, it can be seen that leases are an important aspect in accounting. In lease agreements, the assets have to be tangible in nature. The Australian Accounting Standard Board (AASB) provides some specific guidelines regarding the recognition and measurement of leases in the business organizations and the companies need to comply with these regulations. The main aim of this report is to analyse and evaluate the various aspects regarding lease agreements in the companies. AASB Lease Recognition Criteria There are two types of leases; they are Financial Lease and Operating Lease. AASB has different recognition criteria for both the leases. They are discussed in the following section: Financial Leases: At the date of the commencement of the financial year, the lessor needs to use the implicit rate of interest in the leases for the measurement of net investments. In case, it is not possible for the lessor to determine the implicit rate of interest, it is required for the lessor to use discounted rate for the heading of sublease (gov.au 2017). At the time of measuring the total amount invested in the financial leases of the company, the lessor needs to include initial direct costs other than the manufacturing costs. In addition, the lessor needs to reduce the recognition of the amount of income. The implicit rate of interest in financial leases includes the initial costs of the new lease investments. The lessor needs to recognise the total amount of investments in financial leases based on the pattern reflecting a constant periodical rate of return of the net investments of the lessor (gov.au 2017). Operating leases The lessor needs to recognize the payments from operating leases, as income and it needs to be done based on either straight line or another systematic basis (gov.au 2017). At the time of the recognition of operating leases, the lessor needs to recognize various costs that include depreciation at the time of earning from leases. The lessor needs to add the initial direct costs of the leases at the time of leases recognition (gov.au 2017). The lessor needs to present the details about all the operating leases in the financial statements at the end of the financial years. Difference between Operating and Financial Leases Operating Lease Financial Lease The risks ands and rewards of asset ownership remain with the lessor (Brealey et al. 2012). The risk and rewards related to the ownership transfer to the lessee. Operating lease needs to be treated as rents and there is no need to show it in the balance sheet. Financial leases need to be treated like loans and thus, it appears in the balance sheet. There is not any purchase option of the asset in the lease period. Financial leases have the purchase option in the lease period. No running costs of the assets need to be borne(Grinblatt and Titman 2016). Running costs need to be borne and it is higher. The lessor cannot claim any amount for depreciation. The lessor can claim the amount interests as well as depreciation. The lessee has to pay only the monthly lease payments. The lessee has to pay tax, maintained and insurance expenses (Vernimmen et al. 2014). Example As per the 2017 annual report of CSL Limited, on 30 June 2017, it can be seen that the company has reported $3.1 million and $2.5 million in 2017 and 2016 respectively as current lease liabilities; and $22.3 million each for 2016 and 2017 as non-current liabilities. As per the earlier discussion, leases under current liabilities are operating leases; and leased under non-current liabilities are considered as financial leases. Thus, from the above discussion, it can be seen that CSL Limited reported both financial as well as operating leases in 2017 (csl.com.au 2017). Implications The new AASB 16 standards help the business organizations in the proper reporting of various financial aspects like leases of assets, liabilities, debts, assets, debt agreements, profits and expenses (kpmg.com 2017). Previously, the accountants of the companies had to face many difficulties in the recognition of leases, expenses, profits and others. However, with the help of new AASB 16 standards, the accountants have become able to maintain proper disclosure of financial aspects. In case of CSL Limited, it can be seen that the company has been able to segregate the amount of operating lease and financial lease in the most appropriate manner. Apart from the leases, in case of the recognition of expenses and debts, the company has adopted the strategy of fair value in which the market value of the assets and loans has been taken into consideration (csl.com.au 2017). Thus, from the above discussion, it can be seen that the new AASB 16 framework has overall effective effect on the finan cial reports of CSL Limited. Conclusion From the above discussion, it can be seen that there are two kinds of leases; they are Financial Lease and Operating Lease. For both these two types of leases, AASB 16has different recognition criteria. In addition, the above discussion shows that in financial lease, ownership does not transfer. However, in operating lease, there is not any transfer of ownership. From the financial report of CSL Limited 2017, it can be seen that the company has shown their operating as well as financial leases on a separate basis and this new AASB 16 standard has overall good implication on the companys financial statements. References Aasb.gov.au. (2017).Accounting standards. [online] Available at: https://www.aasb.gov.au/Pronouncements/Current-standards.aspx [Accessed 22 Sep. 2017]. aasb.gov.au. (2017).Definition and Recognition of the Elements of Financial Statements. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf [Accessed 22 Sep. 2017]. aasb.gov.au. (2017).Leases. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB16_02-16.pdf [Accessed 22 Sep. 2017]. Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012.Principles of corporate finance. Tata McGraw-Hill Education. csl.com.au. (2017).Annual Report 2016/2017. [online] Available at: https://www.csl.com.au/docs/802/1/CSL_AR17%20(secured),0.pdf [Accessed 22 Sep. 2017]. Grinblatt, M. and Titman, S., 2016.Financial markets corporate strategy. KPMG. (2017).Impact of AASB 16: the new Leases standard. [online] Available at: https://home.kpmg.com/au/en/home/insights/2017/04/aasb-16-leases-standard.html [Accessed 22 Sep. 2017]. Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014.Corporate finance: theory and practice. John Wiley Sons. Dakis, G.S., 2016. Upcoming changes to contribution and leasing standards. Governance Directions, 68(2), p.99.