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TACC406 Accounting Theory and Applications
Due Date: 5pm Friday, 6 September 2019
Total Marks: 20 marks Number of Questions: 1 Part
Instructions: All questions should be attempted.
The marks of each question would be awarded based on your understanding of the questions, concepts and procedures; hence you should demonstrate your answers step by step.
PLEASE READ THIS DOCUMENT CAREFULLY BEFORE YOU BEGIN, SO YOU DO NOT LOSE MARKS.
INSTRUCTIONS TO FOLLOW:
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The assignment is worth 20% of the total mark for the unit. The marks awarded will depend on the quality of the reasoning exhibited and the ability to express the argument in a concise manner.
The assignment must be submitted on or before 5pm Friday, 6 September 2019. Late assignments will be accepted up to 72 hours after the submission deadline. There will be a deduction of 20% of the total available marks made from the total awarded mark for each 24 hour period or part thereof that the submission is late (for example, 25 hours late means a 40% penalty).
HOW TO SUBMIT YOUR ASSIGNMENT
No hard copy is required
You MUST submit an electronic copy through TURNITIN on Moodle for checking plagiarism. Failure to submit it may result in a zero mark for the entire assessment.
PART A (20 MARKS)
In an address entitled ‘Introductory comments to the European Parliament’ (made in Brussels, Belgium) on 11 January 2016, the Chairperson of the IASB, Hans Hoogervorst, made the following comments in relation to the new accounting standard on accounting for leases (as reported 11 January 2016 on the IASB website at www.ifrs.org):
I would like to make some comments about our upcoming Leases Standard, which we will publish the day after tomorrow. Currently, listed companies around the world have around 3 trillion euros’ worth of leases, especially in sectors such as the airline industry, retail and shipping. Under current accounting requirements, over 85 per cent of these leases are labelled as operating leases and are not recorded on the balance sheet. Clearly, the accounting today does not reflect economic reality. Despite operating leases being off balance sheet, there can be no doubt that they create real liabilities. During the financial crisis, some major retail chains went bankrupt because they were unable to adjust quickly to the new economic reality. They had significant long-term operating lease commitments on their stores, and yet had deceptively lean balance sheets. In fact, their off balance sheet lease liabilities were up to 66 times greater than the debt reported on their balance sheet. Moreover, the current accounting for leases leads to a lack of comparability. An airline that leases most of its aircraft fleet looks very different from its competitor that bought most of its fleet, even when in reality their financing obligations may be very similar. There is no level playing field between these companies. These problems will be resolved in the upcoming Leases Standard. All leases will be recognised as assets and liabilities by lessees. The accounting will better reflect the underlying economics. This change is expected to affect roughly half of all listed companies and will not be popular with everyone. Accounting changes are often controversial and can be met with warnings of adverse economic effects and costs of system changes. The IASB has looked at all these possible risks very carefully and we will publish a detailed effect analysis on the Standard. Our conclusion is that the risks and costs of the new Leases Standard are manageable. First of all, IFRS 16 will not put the leasing industry out of business. Leases will remain attractive as a flexible source of finance. It will remain appealing to companies to lease assets so that they do not bear the risks of owning them. While the cosmetic accounting benefits of leasing will disappear, the real business benefits of leasing will not change as a result of the new Standard. We do not deny there will be costs involved in updating systems to implement the new Leases Standard, but we have done our best to keep these costs to a minimum. For example, we are not requiring companies to recognise assets and liabilities for short term and small ticket leases. This should be especially beneficial for smaller companies. In sum, we expect the benefits of the new Leases Standard to greatly outweigh its costs. The new visibility of all leases will lead to better informed investment decisions by investors, and to more balanced lease-versus-buy decisions by management. IFRS 16 will lead to improved capital allocation, which should be beneficial for economic growth.
Explain why the Chairperson of the IASB believes that the former accounting standard for leases did ‘not reflect economic reality’. (4 marks)
What is the reason why, under the former accounting standard, reporting entities’ ‘off balance sheet lease liabilities were up to 66 times greater than the debt reported on their balance sheet’? (4 marks)
Why does the Chairperson of the IASB argue that under the former accounting standard for leases there was ‘no level playing field’ between some airline companies? (4 marks)
Why do you think the Chairperson of the IASB said that the new accounting standard for leases ‘will not be popular with everyone’? What would cause this unpopularity? (4 marks)
What are some of the possible reasons why the Chairperson of the IASB would say: ‘The new visibility of all leases will lead to better informed investment decisions by investors, and to more balanced lease- versus-buy decisions by management’? (4 marks)
END OF THE ASSIGNMENT.
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