Intermediate Accounting 2 Assignment

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Year

Opening Balance

Interest Payable

Payment

Closing Balance

1

25771

2062

10000

17832

2

17832

1427

10000

9259

3

9259

741

10000

0

- Analysis of lessor

Since the changes to the accounting requirements the changes to the guidance on the definition of a lease apply to parties to a contract. However, IASB does not substantially change how a lessor accounts for leases but retain the accounting model in IAS 17. Nevertheless, IFRS 16 requires a lessor to provide additional disclosures to improve the quality of financial statements for investors to evaluate better. Therefore, the effectiveness of corporation financial statements is improved in terms of major content and disclosure notes.

- Implications

The new standard definitely will make effects on a company’s balance sheet and income statement. For companies which have material off balance sheet leases, it is reasonably expected that there will be an increase in lease assets and financial liabilities. Since it classify all financial assets and operating assets as all assets. In addition, the right-of-use asset is a non-current and financial asset. The liability is part of current and non-current financial liabilities. As for the effects on income statement, applying the IFRS 16 changes the expense pattern. Given the above table, it is easy to get the total expense in every year by subtotaling the depreciation expense, interest expense and maintenance expense. I made the table to compare each year expense under different standards.

Year

Expense (IAS 17)

Expense (IFRS 16)

1

$11000

$11652

2

$11000

$11017

3

$11000

$10331

Total

$33000

$33000

It is apparently that the pattern of expenses has changed through loading of interest at the beginning but declining in interest expense with the liability decline. In a whole, both standards have the same profit or loss impact in terms of the lease duration. The picture below shows the relationships of the expenses.

[pic 2]

Besides, there are few implications for lessors. Although changes to accounting do not influence the demand for assets materially, IASB acknowledges that the change in lessee accounting may make an influence on the leasing market if companies decide to buy more assets, as a consequence, lease fewer assets.

- Conclusion—Benefits VS Cost

To conclude, it seems that benefits brought from IFRS 16 outweigh the costs from my personal view, although it incur costs of setting up systems, training staffs and communicating changes to external parties. The effective of IFRS 16 will lead to a more faithful representation of assets and liabilities and more transparency about the company’s financial leverage. Besides, it improves the comparability between companies.

In a whole, it is expected to facilitate better capital allocation by enabling better credit and investment decision by investors and companies.

Reference

IFRS 16 Project-Summary

http://www.ifrs.org/Current-Projects/IASB-Projects/Leases/Documents/IFRS_16_project-summary.pdf

IFRS 16 Effects-analysis

http://www.ifrs.org/Current-Projects/IASB-Projects/Leases/Documents/IFRS_16_effects_analysis.pdf

http://www.ifrsbox.com/ifrs-16-ias-17-leases/