Evaluate different accounting theories and their implications in policy choice by managers. d. Synthesize the complex elements of the Conceptual Framework and apply them to accounting activities. e....

Accounting theories -Issues
Running Header: Accounting Theories - Issues
Title: Accounting Theories - Issues
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Date: 27/09/2017
Preface
Many entities across the industries use leasing as a prefe
ed mode of financing. Leasing is a favourite mode of financing especially in the airlines, retail and shipping industries as these organisations do not like to want huge initial outlay or ca
y bulked up bo
owings and assets on their financial statements. In some industries leasing of the asset is the only mode available. Leases are also popular as it shields company from obsolescence of the underlying asset and residual value risk.
Leases are identified into two distant types i.e., Finance (as known as Capital) or operating lease based on the transfer of control/ risks and rewards (economic ownership) of the underlying assets. When control of the underlying asset is transfe
ed, it is considered as Finance lease and if not it is called Operating leases. In IAS 17, Finance lease is considered as an on-balance sheet item and operating lease is kept outside the balance sheet. Liabilities of operating lease keeping as off balance sheet items make the balance sheet look trim and eye catching.
The following part of the report will provide insight into the IAS17 and comparison of the same regime with IFRS16 (IAS,2000).
(A)IAS 17 - Cu
ent lease accounting regime
Lease accounting standard provide alternatives to organisation so that they could choose the one best reflect its economic affairs. But it is often noticed that this discretion is misused by the organizations. Organisations construct their lease financing transaction as operating leases in order to avoid loading up the relevant assets and liabilities on balance sheet. It has been observed that under cu
ent IAS 17 regime, around the 85% of leases are considered to be operating leases and consequently held the liabilities as off-balance sheet items. Economic reality of these liabilities is otherwise. Even though the liability of operating leases is not shown on the balance sheets, lease agreements create real liabilities. Asset and liability structure perspective operating leases stand at very attractive position as explained below(Iasplus).
· Debt equity ratios show a positive picture due to understatement of liabilities by ignoring the liabilities created in the operating leases
· Assets from the operating leases too are not recognized on balance sheet. This would be inflate the return on total assets
· Principle payments due are NOT shown in cu
ent liabilities, leading to lower cu
ent liabilities and overstatement of cu
ent ratio.
· Operating leases are considered as part of operating expenses instead of finance charges, Interest Coverage ratio will show a better picture due to this.
(B)Anomalies in the cu
ent regime
Organisations are better placed with the operating leases from the financial analysis perspective as the profitability and finance ratios provide comparatively better positions. Organisations were able to fulfil debt covenants and raise additional finances easily on the back of rosy picture provided by the operating leases. This has lead to more and more organisations started pursuing operating leases and led to Industry wise phenomenon of understatement of liabilities. Operating leases per se would not impact the organization profitability or liquidity as long the management is taken cognizance of the underlying liabilities of operating leases and planed their cash flows around it. But the management tend to ignore the liabilities which are not acknowledged on the balance sheet. Off-balance sheet started liabilities are piling up multiple folds. It is estimated that industry wise off-balance sheet liabilities are 66 times more than the liabilities that are reported on balance sheet. Management decisions and planning on cash flows, liquid assets, assets liability matching would lead to disaster results unless these off-balance sheet liabilities are given its due consideration owning to the magnitude of these liabilities. This has become very apparent during the 2008 melt down, where many big retail chains in US went down due to...