Question

Question - reference to IFRS 16, Leases

1.Explain the main reasons why IASB issued the new or revised standard [Hint: You could look for journal articles on this subject].

2. Compare the standard with the conceptual framework and evaluate whether the changes have led to greater or less consistency with the framework [Hint: You could consider issues like definitions]

3. Discuss some of the challenges and implications of adopting the new standard. Consider this from a global perspective as well as a Pacific perspective [Hint: You could look at relevant internet sites and forums, seek opinions from practicing accountants etc].

Answer 1

1. Explain the main reasons why IASB issued the new or revised standard:

• Ending the guesswork involved when calculating a company’s often substantial lease obligation, these new accounting requirements will bring lease accounting into 21st century comparable accounting.
• The new standard will provide much-needed transparency on companies lease assets and liabilities, meaning that off balance sheet lease financing is no longer hide in the shadows, companies will faithfully represents lease transactions.
• Companies that lease and those that borrow to buy will become more comparable and based upon that decisions will be of good quality.
• Provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

2. Compare the standard with the conceptual framework and evaluate whether the changes have led to greater or less consistency with the framework:

• Revised definition of an asset: A present economic resource controlled by the entity as a result of past events, an economic resource is a right that has the potential to produce economic benefits. Main changes in definition of assets as follows:
  • separate definition of an economic resource—to clarify that an asset is the economic resource, not the ultimate inflow of economic benefits
  • deletion of ‘expected flow’—it does not need to be certain, or even likely, that economic benefits will arise
  • a low probability of economic benefits might affect recognition decisions and the measurement of the asset
• Revised definition of a liability: A present obligation of the entity to transfer an economic resource as a result of past events, an obligation is a duty or responsibility that the entity has no practical ability to avoid. Main changes in definition of liability as follows:
  • separate definition of an economic resource—to clarify that a liability is the obligation to transfer the economic resource, not the ultimate outflow of economic benefits
  • deletion of ‘expected flow’—with the same implications as set out above for an asset
  • introduction of the ‘no practical ability to avoid’ criterion to the definition of obligation

So, Changes made to IFRS 16, will result in greater consistency with the framework.

3. Discuss some of the challenges and implications of adopting the new standard. Consider this from a global perspective as well as a Pacific perspective:

• Changing to IFRS Standards does not come without cost and effort. The companies reporting will generally need to change at least some of their systems and practices; investors and others using financial statements need to analyse how the information they are receiving has changed; and securities regulators and accounting professionals need to change their procedures.
• IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.
• IFRS 16 replaces IAS 17 effective 1 January 2019, with earlier application permitted. IFRS 16 has the following transition provisions:
  • Existing finance leases: continue to be treated as finance leases.
  • Existing operating leases: option for full or limited retrospective restatement to reflect the requirements of IFRS 16.
• But academic research and studies by adopting jurisdictions provides overwhelming evidence that the adoption of IFRS Standards has brought net benefits to capital markets.
  • The documented benefits include a lower cost of capital for some companies and increased investment in jurisdictions adopting IFRS Standards. Some companies also report benefits from being able to use IFRS Standards in their internal reporting, improving their ability to compare operating units in different jurisdictions, reducing the number of different reporting systems and having the flexibility to move staff with IFRS experience around their organisation.
  • In Japan, where use of IFRS Standards has been voluntary since 2010, a report by the Japanese Financial Services Agency identified business efficiency, enhanced comparability and better communications with international investors as the main reasons why many Japanese companies had chosen to adopt IFRS Standards.