Essay: Global Accounting Standards Analysis In Light Of IFRS/AASB 16.

Article Analysis

1. The IASB (International Accounting Standards Board) develop accounting standards to be used by business entities for developing the financial reports. The accounting standards have undergone several changes in past decade. In this context, this section of the report undertakes an analysis and examination of an accounting article related to the emergence of global accounting standards. The article selected is ‘Global accounting standards to test tenants’ published in August, 2017, in The Sydney Morning Herald. The analysis of the article is carried out to develop a theoretical understanding of the issues discussed in the article on the behalf of the senior accountant of a firm.

The article has emphasized on the growing significance of accounting activities for assessing the performance of a business entity. The business organizations around the world have followed various accounting techniques that can ease their business practices (Pickard, 2007). In this aspect, global accounting standard becomes significant. The article analyses the accounting standards which are followed by the business organizations around the world and the issues leading to developing a common set of universally accepted accounting principles. The key issues discussed in the article are explained with the help of the significant accounting theories related to development of accounting standards.

The new accounting standard IFRS/AASB16 has drastically changed the way of accounting of lease related aspects. It has changed the way in which lease was recognized in the financial statement of a business organization. This standard has significantly changed the way of accounting being done in earlier times, in the same way it promises to bring out the best from the leasing aspect of accounting in international accounting (Wagenhofer, 2009). The article, Global accounting standards to test tenants (2017) has assessed various aspects of IFRS/AASB in leasing and how it is going to affect the global financial accounting. The article has majorly focused on the liabilities that were faced by the tenants and in addition to this, it also discussed about the IFRS/AASB 16 Standard (Cummins, 2017). The standard has been widely accepted and recognized by the organizations around the world. The article explains that although the standard is quite useful and dynamic for the leasing aspect but it has certain issues associated with the same (Carmona and Trombetta, 2010).

The major issue related with IFRS/AASB16 in leasing is that it has increased the paperwork which is concerned with leasing; in addition to this it has also laid emphasis on new administration and new systems. The article discusses that the standard can have far reaching financial implications on the financial statements of a business organization (Cummins, 2017).  The major change in the financial statement is that it will be recorded in the same as asset or liability for a period of one year. The advantage of this standard is that it has helped the tenants in identifying their right of use of property or asset, but the article discusses that the right of use of asset is determined on the present value which will also consist of all future known occupancy costs which can cause loss to the tenants (Cummins, 2017). In addition to this, the article explains that the asset may also include all the indirect costs that are associated with leasing such as leasing fees, design fees and any estimated cost which can create obligation for the tenants to be paid.

Positive Accounting versus Normative Accounting Theories

Accounting is a crucial part of an organsation, it is termed as the language of finance, and its major function is to provide information about the working and functions of the organization in an accurate and transparent manner. There are generally two theories that have dominated the accounting process. Positive and normative accounting is the two theories on which accounting were based.  Positive accounting was followed earlier in which real life events and transactions were examined so that management can design their practices according to those practices (Arnold, 2009). However as the time change the procedure of doing accounting also changed dramatically. It is evident that the international business has changed their ways of doing business and in that phase accounting has also changed their procedures (Vorster, 2010). Nowadays the management has shifted their attention to a fundamentally different approach. A different kind of accounting theory has emerged which has gained the attention of the business organsation and that is normative accounting theory. The theory focuses on the aspect of what should be done in place of what is happening in the market (Chalmers et al., 2012). The article explains the same and discussed that the business organsation has turned their attention from positive theory of accounting to normative theory of accounting. The business organsation has done this in order to remain up to date in this dynamic environment. This theory has helped the firm to remain competitive in the market (Cummins, 2017).  

In respect to lease accounting, the theory followed by business organization is positive as the incorporation of IFRS/AASB 16 has increased the paperwork, apart from this, it has also included various other cost related with lease which has made lease accounting complex and critical. IFRS/AASB16 has brought significant changes in accounting and it has also made the process of accounting quite easy. The implementation of IFRS/AASB16, accounting procedure has started to include aspects which are important and can have an impact on the financial statement of the business organization (Carmona and Trombetta, 2008). As the article has explained that apart from increased paperwork, various other costs such as lease fees, design fees etc will also be included based on future cost , this approach has significantly helped the organization in realizing the estimated future costing (Cummins, 2017).  However this approach on the other side has increased the burden on tenants, in addition to this all the aspects relate to fees has also increased the complexities of the lease section. This issue is quite major as it can make leasing more difficult. As the leasing section becomes difficult the organization will start avoiding this aspect and the market for the same can face downfall. This can also hamper the reputation and goodwill of the business organization (Gaffikin, 2005).

IFRS/AASB 16 and its Implications for Leasing

The article has discussed about various aspects of leasing, on such aspect is of incentive. The aspect of incentive is applicable for rent free periods; this is also a major cause of concern for the tenants. The article discussed that the standard IFRS/AASB16 has provided stability to the tenants but on the other hand it has also increased the complexities and difficulties of the leasing section. The standard IFRS/AASB16 and its implication has proved quite beneficial and profitable around the world, the same is with the leasing , however there are certain areas in leasing which needs attention so that the issues related to accounting can be addressed on time effectively (Cummins, 2017). The IFRS/AASB16 standard is based on normative theory that is why it is accepted by the firms operating worldwide because it has provided a dynamic approach towards accounting which suits present changing environment (Ghanbari et al., 2016).

The article explains that IFRS/AASB16 has proved quite effective in the present day changing and dynamic environment. Its incorporation in the leasing section is quite effective however it has raised the complexities and difficulties in leasing due to various conditions (Cummins, 2017). The leasing document has become bulky and it has asked for various other formalities. Leasing has become easing for tenants but the implementation of IFRS/AASB16 has introduced various obligations for tenants which have resulted in increased difficulties for tenants. With the implantation of IFRS/AASB16 in leasing the tenants now get to know about the right of use of asset and also about the penalties that can be charged if the asset is damaged by the tenants (Gaffikin, 2007).

In addition to this the article also explained that the aspect of gearing will also be affected as the interest cover on capital will fall and loan taken will result in negotiation. The implementation of IFRS/AASB16 can lead to increase in the indirect cost of the tenants. The right of use of asset is also not the right given in favor of the tenants (Cummins, 2017). It harnesses their right to use the asset for which they are paying rent to the landlord. Re-measurement is another aspect which is included in leasing section, this aspect is more time consuming and this changes the assets and liabilities at a variety of exchange rates which can lead to fluctuation in the market and this will make it hard for tenants to purchase an asset on lease. All these aspects can lay impact on the profit and loss structure of the organization (Pierre and Guillaume, 2017).

Impact on Indirect Costs

The application of IFRS/AASB16 in leasing has certainly helped in rejuvenating this aspect of business but on the other side its implementation has also created problems for tenants. Apart from this IFRS/AASB16 has made it mandatory for business organsation to not to record leasing in their financial statements. In general leasing holds for about 5-30 percent of profit and loss statement of a business organsation (Cummins, 2017).   The lack of rental expenses in financial statement can lead to increase in the EBTIDA. The sales and leasing will lose their effect as they will no longer remain the part of organization.

Thus, it can be inferred from the overall analysis of the article that the implementation of IFRS/AASB16 has certainly reduced the complexities of accounting. It has brought homogeneity in the accounting practices. The article has assessed IFRS/AASB16 and its implementation in the leasing section of the business organization. IFRS/AASB16 has brought changes in the lease section; in addition to this it has also introduced various issues to the same which are required to be tackled properly and on time.

2. This section of the report provides an analysis of a recent exposure draft of IASB and the associated comment letters in relation to it on the perspective of senior partner of a firm. The exposure draft selected for the purpose is in regard of recommendation of changes in the current accounting standards for identification and recognition of values related to property, plant and equipment.

The IASB has developed an exposure draft for suggesting some changes in the recent accounting standards for measuring property, plant and equipment assets of an organization. The IASB has developed and directed all the business organizations around the world for incorporating the use of IAS 36 (International Accounting Standards) for identification and assessment of property, plant and equipment values of a business organization. As per the proposed standard, the business organization need to reduce the sales proceeds from the cost of the property, plant and equipment realized through the selling of these assets during bringing them to the actual point of its usage. The sales amount received and the cost involved in the development of such items should be reported in the profit and loss by a business organization. The IASB has recommended the adoption of such changes in measuring the value of fixed assets of an organization relating to property, plant and equipment for improving the quality of financial reporting (IFRS® Standards Exposure Draft, 2017).

Conclusion

The inventory produced during testing a property, pant and equipment asset for use should be recognized in the profit and loss through recognition of sales realized and the cost incurred in their development. Thus, as such it will help in improving the quality of financial reporting by disseminating all the necessary information to the end-users relating to the sales proceeds of a business organization. The present accounting standard developed by IASB for measuring the value of property, plant and equipment assets of a company has a drawback that it does not meet the qualitative characteristic of reliability of financial information by concealing the financial facts and figures of actual sales amount received by an organization (Herrmann et al., 2011). Thus, the proposed changes in relation to the current accounting standards would be beneficial to all the associated parties that are, the accounting bodies, the business organizations and the stakeholders. The adoption of IAS 36 by all the business corporations would help in attaining a convergence of all the existing accounting standards related to measuring the value of property, plant and equipment. The business organizations would benefit by improving the transparency of their financial operations and thereby gaining the trust of all its stakeholders. The stakeholders such as investors and creditors would benefit from receiving reliable and accurate financial information and thus supporting their decision-making process relating to investment in a particular business organization (Mande, 2014).

The theory of public interest is regarded to be an economic theory that is developed for promoting the general welfare of people through correcting the inefficient market prices. The theory is widely used by the accounting regulators in order to develop the accounting rules and regulations that promote the welfare of all the stakeholders of a business organization. The theory argues that economic markets are very inefficient and therefore need a regulatory supervision for rectifying the inefficient practices that helps in promoting the interest of overall societal members (Gaffikin, 2007). As such, the behavior of the regulatory body, that is IASB, in proposing the changes in the IAS 36 standard for measuring the value of property, plant and equipment. The current accounting standard in this context was not able to meet the needs of end-users of financial information as such it does not provide actual information regarding the sales income of business corporations. Therefore, as per the public interest theory the intervention of the IASB is required for promoting the welfare of the end-users through preparing changes in the accounting stand so that it provides reliable and relevant information (IFRS® Standards Exposure Draft, 2017).

The exposure draft developed by the IASB is open for public comments to gather the perspective of different respondents in relation to the proposed changes in the accounting standard for identifying the sales proceed arising before the actual use of property, plant and equipment assets of an entity. As such, the comment letters developed in relation to the exposure draft have been discussed in the present section as follows:

• Comment Letter 1 from Brazilian Accounting Committee: The committee is involved in the developing and implementing the accounting standards in the business organizations of Brazil.  As per the views of committee, the exposure draft proposed by IASB on restricting the reduction of cost of any item of property, plant and equipment from the sales amount realized through selling such items before their intended use. The Brazilian committee has agreed with the proposed changes as the committee states that the proposed changes covered with the views of accounting the income realized from incidental operations in the profit and loss statement.
• Comment Letter 2 from the AAT (Association of Accounting Technicians): In the views of AAC, the recommend changes in the IAS 36 standards suggested by IASB are fair and valid. The reason provided by the AAT for their agreement is that because some industries such as manufacturing incurs high cost during asset testing before it is actually available for use. Therefore, the AAT stated that any sales realized from the inventory produced during asset testing before it is actually available for use do not have a major impact on the cost value of assets. Thus, the sales realized from selling such items should be recognized in the profit and loss account instead of reducing their amount from the cost of assets.
• Comment Letter 3 from the DRSC Berlin Accounting Body:The DRSC does not agree with the proposed change sin the IAS 36 standard due to identification of the following issues related with the changes:

1. There should be provided more clarity in relation to asset testing and the items produced during such testing
2. The sales realized from selling the items produced during asset testing should only be deduced from the cost
3. Also, there should be provide more disclosure in relation to the selection of deduction of only sales revenue realized from selling items of asset testing

• Comment Letter 4 from an individual names ‘Rhafael’ in Philippines’: As per the views received from Rhafael, the changes proposed by IASB are fair enough as it increases the relevancy of financial information presented to the end-users. The recommend changes will resolve the conclusion reading the treatment of sales proceeds realized from selling the items produced during asset testing by a business organization.

The provision regarding the proposed exposure draft in relation to property, plant and equipment is given under Para 17 (e) of the IAS 16. As per the provision of this accounting standard any testing assets and any inventory produced during the testing in relation to the property plant and equipment must be added to the value of cost of property plant and equipment. There was no deduction of such expenses at the same year and only depreciation can be claimed over the useful life of the assets. If assets are sold than such will be treated as capital loss or capital gain depending upon the situation. Various accounting bodies, individuals and organizations have analyzed the exposure draft and proposed their views in favour or not on favour through way of comment letters. Comments letters that favours the exposure draft wants that there should be change in the above provision and expenditures that are done in relation to testing should be allowed as normal business expenses deductible in the same year and comment letters that are not in favour of the exposure draft wants no change in the above provision.

Comment Letter 1, 2 and 4 are in favour of exposure draft and theory of private interest applies to these letters. Only comment letter 3 opposes the exposure draft and want some changes before the exposure draft is being imposed. So this letter is in public interest. 

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