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Accounting For Leases by Lessors. This report is a document that is outlining the critical evaluation of the proposed leasing standard which the IASB / FASB are trying to introduce.

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Introduction

Accounting For Leases by Lessors Contents Page Page Introduction 1 IASB 17 1 Balance Sheet effect 2 (Changing of investment ratio figure analysis) Grant Thornton Research 3 International Implications (IAS16) 3 Sub Leasing (IAS 40) 4 Contingent Asset / Liability (IAS 37) 4 Sale and Lease back Agreements (IASB17) (IAS 18) 5 Conclusion 5 This report is a document that is outlining the critical evaluation of the proposed leasing standard which the IASB / FASB are trying to introduce. IASB stands for International Accounting Standards Board, and is the international accounting standard adhered by UK and European companies. FASB stands for Financial Accounting Standards Board and is used in the US as a generally accepted accounting principle (GAAP). After the Enron scandal a project has been set up to combine the FASB and IASB so that companies can have more clarity on how to account for certain transactions internationally but more importantly to have a single standard that is used across the board, therefore can be used interchangeably by different economies. At the moment UK companies who trade in the US adhere to a principle called SOX (Sarbanes Oxley) to comply with the US GAAP accounting rules. The Sarbanes-Oxley Act of 2002 is mandatory to ALL US or US affiliated organization. The Sarbanes-Oxley Act is arranged into eleven titles. As far as compliance is concerned, the most important sections within these are often considered to be 302, 401, 404, 409, 802 and 906. These are the over-arching rules that a public company accounting board have established by the act and was introduced amidst a host of publicity major corporate and accounting scandals including the likes of Enron, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the nation's securities markets.(*1) The report will outline the issues raised by the new lease standard and its effects on the preparers of accounts and the consequential effect on the final financial statements which stakeholders and potential investors use to determine the successful nature of the business. ...read more.

Middle

So one could say the issue lays with the understandability of the accounts not the transparency. Another issue which comes straight to mind when reading this article is that Tesco is an international company. The likes of them being in countries such as China and India would make the accounting treatments of their assets more difficult to value and treat their assets in their annual accounts. The main reason being that these countries have their own accounting rules and principles which are not enforced by IASB or UK/ US GAAP. They therefore would have to use the exchange rate to bring the valuation into pound sterling, so they can incorporate the figure into their annual published accounts. Such methods would then make the word "true and fair" loose, as conversions would bring inconsistencies and financial distortion into the published accounts. Also with such methods one could be host to several problems including "holding gains and losses". Holding gains and losses result from changes in the prices of assets. They occur on financial and non-financial asset and liabilities. Holding gains and losses are accrued to the owners of assets and liabilities purely as a result of holding the assets or liabilities over time, without transforming them in any way. In Tesco's case this could take place when having a lease on premises aboard, so when they initially lease the building the fair value of the asset is (x) amount after they have exchanged it into pound sterling. But then later on in the year when they have to put the value again into the balance sheet the exchange rate could have changed, therefore raising a holding gain or loss. This increase or loss of equity would have an effect on the balance sheet but how would one state the adjustment? One way could be to impair the asset and therefore revalue the asset again, so the extra value is written off as a cost. ...read more.

Conclusion

The main reason for this would be that markets aren't totally efficient, therefore if you were to bring a new idea or standard onto the table the market would need time firstly to understand the standard and its implications, and secondly the standard would need time to adjust its self to the market and get rid of the teething problems. These problems at the start would give rise to market inefficiency and at first will show that the standard is not working. Also alongside this point you get the problem that humans are resistant to change, so therefore will try anything to show the standard is not working to avoid the extra work in changing to the new way. You will get this resistance as shown by the report; this change will bring all but short term leases onto the balance sheet and will change their balance sheet in a big way. Also investment lending till the market accepts the new standard will bring a different accepted investment ratio level. However if one was to do this survey after a number years have gone by and both market plus companies have adjusted and understood the standard change, one would get a better idea on how the change in standard has affected the transparency and the ability to stop creative accounting. Overall in regards to Tesco and Sainsbury, both have valid arguments for rejecting the new standards, however it will be some time before the affect of the new proposed standard will be seen on the balance sheet, and in turn the bottom line figure of these 2 organisations. Referencing Page *1 http://www.sarbanes-oxley-forum.com/ *2 http://www.accountancyage.com/aa/news/1934865/tesco-sainsburys-attack-lease-accounting-proposals *3 http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=900000011123#summary *4 http://www.accountancyage.com/aa/news/2121299/lease-accounting-changes-little *5 http://www.iasplus.com/standard/ias16.htm *6 http://www.iasplus.com/standard/ias40.htm *7 http://www.iasplus.com/agenda/leases.htm *8 http://www.iasplus.com/standard/ias37.htm Other sources for information * http://www.accountancyage.com/aa/news/1809151/lease-proposals-add-gbp60bn-books (Adding to books hence 25% decrease in profit) * http://www.accountancyage.com/aa/news/1933143/lease-rules-add-gbp737bn-ftse-100-balnce-sheets (FTSE 100) * International Financial Reporting And Analysis, 3rd edition, Alexander Britton and Jorissen. * Financial Accounting An International Introduction,4th Edition, David Alexander and Christopher Nobes * Lecture notes. ?? ?? ?? ?? [Type text] ...read more.

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