The overarching aim of GPFR is decision usefulness, supported by relevance, reliability and comparability. The wish to achieve comparability and (by implication) consistency over time is the reason to have reporting standards (Schipper 2003). There has though, been widespread and longstanding criticism that accounting rules fail to disclose information, or present it in ways that users are unable to incorporate in their decision-making processes (Mackintosh, 2006; Pozen, 2007). Too often accountants and researchers operate within the parameters set by the standard setters, rather than probleming and challenging them.
This criticism became more pronounced in wake of the Global Financial Crisis (GFC) when a number of reports, including those from the Financial Stability Forum (2008), the Turner Review (2009), and Congressional Oversight Panel (2009) warned that accounting rules facilitated different forms of off-balance sheet financing (OBF). These reports linked GFC to OBF as regulators and other equity market stakeholders were misled regarding level of risk faced by reporting entities.
Leases are a important financial commitment to an entity, but the fact that they are presently not reflected on balance sheets could present a misleading picture about leverage and the assets that lessee uses in its operations. AASB117 has been heavily criticised for its inconsistent treatment regarding leases. The present distinction between finance and operating leases provides incentives to structure some transactions as operating leases, which has led to a significant increase in off-balance sheet financing.
The AASB and IASB issued an exposure draft on leases in May 2013 (ED242 and ED/2013/6 respectively). The exposure draft proposes that all leases, except for short term leases, be included on the balance sheet.
Critically evaluate and discuss whether the exposure draft is an improvement on AASB117 in terms of decision usefulness. Your response should include a review of the current literature relating to leases and off-balance sheet financing. You should refer to Statements of Accounting Concepts, the Framework, other relevant accounting standard(s), IFRIC and UIG.
In addition to your literature review, you are required to determine the nature and extent of the current accounting treatments and disclosure of leases within financial statements for two companies: Monadelphous Group Ltd and UGL Ltd from Industrial sector listed on the Australian Stock Exchange for the financial years ended 2010, 2011 and 2012 (i.e. 3 years) and show how these leases will be reported under the requirements of the exposure draft. You need to consider:
• how the companies classify leases
• how they account for the leases
• how leases are disclosed
• using relevant ratios, indicate the impact this has on the financial reports.
You are require to develop argument using literature and then use the data from the company’s annual reports to support your argument. It is also your job to identify ratios and the variables of interest and how they will be reported under exposure draft, etc.
• The research and technical component of assignment is to be typed.
• Your group report must be approximately 1500 words, in addition to any attachments/appendices.
• Additionally, an executive summary of no more than one page must be presented in the report.