This week discussion introduces the accounting policies and principles as it applies to lease as well as accounting treatments of Research and development, intangible assets, brand and goodwill. These areas of financial reporting have generated controversies regarding how accounting standard should be applied. To address some of the controversy The International Accounting Standard Board (IASB) and the Financial Accounting Standard board (FASB) issued a joint draft on accounting treatment for lease.
Both IASB and FASB accounting standard for lease – IAS 17 and FASB no 13 respectively adopted an ownership model for accounting for lease. This approach, the extent to which risk ...view middle of the document...
7). One of the major criticisms is the off balance sheet treatment of some lease transaction. According to Biondi et al(2011, 863), “leasing activity in 2008 amounted to $640 billion, while the assets and liabilities arising from many of those contracts are not shown in a lessee’s statement of financial position “Elliott & Elliott(2012, p. 473) also noted that the growth in off balance sheet financing grew to $760billion in 2007 and Franzen et al. (2009, cited in Biondi et al,2011, 863) noted that between 1980 and 2007 the ratio of off balance sheet to total debt increased astronomically by 745%. This implies usage of an economic resource that does not form part of the financial statement along with the obligations.
Other criticisms include lack of uniformity in the treatments and disclosure of transactions involving leasing with concerns around comparability and abuse by companies who reports huge debits as off balance sheet item. To buttress this point, Biondi et al (2011, 861) argues that “the current lease standard is being manipulated improperly by managers, resulting in large amounts of debt being reported off balance sheet”.
Accounting Approaches for Leases
The existing lease accounting standards requires an “ownership approach” for accounting for lease transactions. This requires leases to be classified into either finance or operating leases depending on the extent of transfer of risk and benefits of the lease transaction to the lessee. According to IAS 17, “a lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases”( Iasplus.com, n.da). Finance lease are expected to be capitalized in the lessee financial statement i.e. It should be recorded as an assets and liability in the statement of financial position while the asset depreciated and lease payments allocated between finance charge and outstanding liability. On the other hand, if operating lease, the lessee does not recognize the asset in...