1.Discuss at least two advantages that were available for reporting entities in the previous Accounting Standard for leases AASB 117 Leases.
1.Previously under IAS17, the accounting of leases was done. Now the new IFRS 10 is used in place of that. When the companies were preparing their books of accounts as per the IAS17, the companies had a large number of benefits. The major two are-
In case of IAS 17, the overall costs related to the leases are very less. When it comes to accounting in terms with the new AASB 10, the overall cost of interest is increased. In case of IFRS, the adoption and application of the same also leads to more cost on part of the company. Thus based on monetary benefits, the company is incurring loss.(Chariri, 2017).
The second benefit is that in the previous IAS17, the companies have the right to segregate their leases under operating and financial leases. There were certain conditions which if the leases complied; they were segregated as financial leases. In case of financial leases, risk and ownership are changed at the end of the accounting period, to the lesse. Thus, lesse becomes the possessor of the asset. However in case of the new IFRS, the companies have no option to show these segregation of leases, as operating leases have been removed from the system. Now there are only financing leases. Therefore, even if the lesse does not want to get the asset at the conclusion of the accounting and the leasing period, the asset is transferred to it. In addition, the cost related to the leases are capitalised and cannot be shown as an expense in the general profit and loss statement(Malone, Tarca, & Wee, 2016).
Now that the reporting entities have to capitalise the overall leasing cost, the preference must be provided to buying the asset. However, it depends on a lot of situation. It may be possible that the company needs the asset only for some specific purposes in that case it would be futile for only one period, in that case leasing would be a preferable option. However, if the company requires the asset every now and then, than it can put focus on buying the new asset. It will be economically viable for the new company and help in reducing the overall cost of capitalising the leases. Also buying provides many tax benefits, which might not be present in case of leasing. Thus, we see that after a proper analysis the companies must take the decision whether they want to buy the new asset or they want to take it on lease. The changes in the process of accounting as per the new AASB, has also brought in many alterations in the perception of the company, with the abolition of the operating cost, and capitalisation of the overall costs (Maynard, 2017).
2.In the given case, two scenarios are given. The new AASB 17, has presented the new definition of the leases and the same has been applied to judge whether there identifiable assets or not. Leases are type of agreement between the lessor and the lesse where they transfers the right to make use of an asset in return of certain monetary consideration and the same is accounted for in the books of account of both the parties (Smith, 2017). In the first scenario, there is an identifiable asset i.e., the right to use the three specified and physically identifiable dark fibres. In this case, the customer definitely controls the use of the asset, which is identified over the lease period of 15 years; the lessor is just responsible for the maintenance and repair of the same over this period in case the fibres are damaged (Abbott & Kantor, 2017). Yes, scenario one consists of the lease and the lessee has the right over the asset. In this case, all the three points that are mentioned are affirmative (Minnis & Sutherland, 2017).
In the second scenario, the asset is not specifically particular, as though there is a right to use the particular amount of capacity for 15 years, but it is not specifically identified and this can change every now and then (Drew & Grant, 2017). In addition, in this case the customer does not have the ultimate control over the asset, as supplier is the one who makes the final decision on the transmission of the data. Since this scenario does not qualify the definition of the lease, it does not constitute a lease (Chariri, 2017). Thus, not all the three points are affirmative in the same. (Guragai, Hunt, Neri, & Taylor, 2017)
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