Financial And Operating Lease Transactions As Tools In Financial Risk Assessment

1228 words - 5 pages

In the past few decades, lease accounting issue is widely discussed among different kind of enterprises. Nowadays, most investors and creditors in order to make an appropriate decision for their investment, or borrowing money to a company usually rely on the evaluation of a firm’s statement of financial position. However, in recent years, some irregularities within lease accounting have become a critical issue when evaluating the statement of financial position of a company, especially those with a large amount of operating leases. Hence, the central issue to be discussed in this essay is whether both financial lease and operating lease transactions recognized as assets and liabilities in the financial statement in IAS/AASB 117 could allow creditors to assess the firms’ risk precisely. To argue this issue the essay will firstly elucidate whether lease accounting related information in an entity’s financial statement is important for decision-making. Then, several negative aspects in relations to the disclosure of operating lease explores that accounting standard AASB117 at present does not allow creditors or investors to use the corporate financial statement as accurate and up-to-date information.

Obviously, lease accounting information regarding assets and liabilities represented by financial statement are generally considered by investors or creditors as the significant financial information. For instance, according to the Financial Reporting (2011), financial lease accounting require lessors transfer the right of use leased assets to lessees and obtain periodic rental income in return which should be reported as sell profits in the balance sheet. And a single “ right-of-use” approach was proposed by FASB applied consistently to lease accounting for lessees and lessors. So investors and creditors may rely on the sell profits information, which provided by the financial statements as the net assets of the company. Moreover, it is widely acknowledged that lessees have the obligations to pay for the fair value of the leased property or the present value of minimum lease payment calculated at the discount rate at the commencement of the lease term. However, lease payment under the operating lease shall be recognized as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit (Graynor, 2010). Operating lease generally present assets in their statements of financial position according to the nature of the asset and information in off-balance sheet would be more related to the lessee’s obligations. Therefore, despite of the AASB 117 represents lease accounting measurements in the statement of financial position for both lessees and lessors, the incomplete information about lessee’s obligation of operating lease may lead to a dramatic change in a companies’ financial ratio.

In some particular situation, the financial lease and operating lease transactions...

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