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Importance of financial statements
Importance of financial statements
Importance of financial statements
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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 t...
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Hines, R. D. (1991). The FASB’s conceptual framework, financial accounting and the maintenance of the social world. Accounting organizations and society, 16(4), 313-331.
Jesswein, K. R. (2009). Analyzing creditworthiness from financial statement in the presence of operating leases. Academy of Accounting & Financial Studies Journal, 13(1), 75-90.
Kilpatrick, B. G., & Wilburn, N. L. (2011). Convergence on a global accounting standard for leases - Impacts of the FASB/IASB project on lessee financial. International Business and Economics Research Journal, 10(10),55-59.
Seay, S. S., & Woods, J. (2011). The economic impact of FASB's proposed new lease accounting standard. Journal of Finance & Accountancy, 81-14.
Financial Accounting Standards Board. (1985). Statement of Financial Accounting Standards No. 86. Norwalk. Retrieved April 7, 2014, from http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175820922177&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=189998&blobheadervalue1=filename%3Dfas86.pdf&blobcol=url
Reimers, Jane L. (2003). Financial Accounting A Business Process Application. Upper Saddle River, New Jersey, Prentice Hall.
The NAL still favors buying over leasing by $1216. The only other consideration would be that lease may raise the earnings on asset ratio above 12%. But since the PV of the lease payments is greater than 90% of the FMV (assuming the purchase prices is FMV), then it would be considered a capital lease and the asset would go on the Balance Sheet. Therefore there are no earning over asset ratio advantages to leasing.
An alternative to traditional equity and debt financing is leasing. Leasing is undertaken primarily for what purposes?
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
Olusegun Wallace, R. 1996. The Development of Accounting Research in the UK. In: Cooke, T. and Nobes, C. eds. 1997. The Development of Accounting in an International Context. London: Routledge, pp. 218-254.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
Marshall, D. H., McManus, W. W, & Viele, D. (2002). Accounting: What the Numbers Mean. 5th ed. San Francisco: Irwin/McGraw-Hill.
Cornaggia, K. J., Franzen, L. A., & Simin, T. T. (2013). Bringing leased assets onto the balance sheet. Journal of Corporate Finance, 22345-360. http://dx.doi.org/10.1016 /j.jcorpfin.2013.06.007
In a significant step towards convergence, the FASB and IASB (“the Boards”) issued the Exposure Draft, Revenue from Contracts with Customers in 2010. The goal was to create a single joint revenue recognition standard that companies could apply consistently across industries and capital markets thereby improve financial reporting. The Boards highlighted a number of improvements in the proposed standard - removing inconsistencies, improving comparability, requiring enhanced disclosures and clarifying the accounting for contract costs. Instead of focusing on “realized/realizable” and “earned” the Exposure D...
...n. Based on the definition of asset/liability, the operating leases items meet it. Therefore the amount should show as asset/liability off balance sheet as well.
Private and public accounting has long been discussed and disputed in regards to financial reporting. Since the Financial Accounting Standards Board (FASB) was created in 1973, accountants have called for different accounting regulations for private and public accounting sectors, as private companies do not have the resources to meet the complex requirements of public companies. Private companies currently are not required by law to issue annual or quarterly financial statements (James, 2012). Private companies do, however, have the option to apply the U.S. Generally Accepted Accounting Principles (GAAP), cash basis, or accrual accounting to their financial statements (James, 2012).
Off balance sheet reporting has been the cause of stakeholders of various companies to lose thousands of dollars because liabilities are not fully disclosed on the parent company’s statement of position. Investors and other stakeholders use ratios such as the debt-to-equity ratio and return on assets ratio to determine a company’s ability to pay its long term debt. Operational leases, an example off balance sheet tool, is a financial structure that allows a company to use property, plant, or equipment without the legal rights to ownership. By creating an off balance sheet entity, sponsoring companies are not required to include special purpose entities on their balance sheet. Operational leases, often referred as synthetic leases present a problem for investors and other stakeholders because the balance sheet does not demonstrate an accurate scope of overall financial position.
AASB, Australian Accounting Standards Board, Statement of Accounting Concepts SAC4 ‘Definition and recognition of the elements of financial stat
A lease is an interest in land that permits the holder to enjoy the land for the duration of the lease. There are two types of leases: fixed term and periodic tenancies. The former may exist for any period of time provided the maximum duration is fixed while the latter is characterized by payment at a regular fixed interval such as weekly, and it continues to be automatically renewed until either the landlord or tenant chooses to terminate the lease. In contrast, a licence is a personal authorization to occupy or use the land owned by the freeholder. There are four types of licences namely: bare licences, licences coupled with an interest, contractual licences, and estoppel licences However, unlike a lease, a licence does not equate to an estate or interest in land, it is basically a legal right for the licensee to occupy the property without being considered as a trespasser. As the freehold owner of the block of flats, Henry’s success in his quest to obtain an order for possession for the three flats is largely dependent on the status of the occupants: whether they are licensees or leaseholders.