The first proposal of the treatment paper was the proposal of two different attacks to specifying the range of the new rental accounting criterion. The first attack outlined that the range of the proposed theoretical account should be based on the range of bing leasing criterions. In contrast, the 2nd attack considered was to take a cardinal restructuring of the bing definition of a ‘lease ‘ . The board ‘s preliminary position is to take to first attack and establish the range on the bing criterions.[ 1 ]
Logically talking, establishing the range of the new criterion on the bing range will do a new criterion easier to understand and implement, this is because the bing criterions will be familiar to components.[ 2 ]It could besides be perchance more adept to concentrate on the cardinal characteristics of a new accounting attack for rentals before seeing whether any alterations in range are necessary. This is of import to let a significant sum of clip for a new criterion to be completed by 2011, as intended by the boards.[ 3 ]
Although the board has taken a strong stance against a cardinal reconsideration of the bing range, they have considered doing accommodations and appropriate inclusions/exclusions to ease betterments to the range. In chapter 2 of the treatment paper, the boards conversed about whether ‘non-core assets ‘ and ‘short-term rentals ‘ should be excluded from the range[ 4 ]. Favoring to except or include either in the range will be dependent on many facets.
In footings of back uping the exclusion of ‘non-core assets ‘ , users may believe that rentals of assets that are non indispensable to the operations of an entity ( non-core assets ) , are of small involvement to them and other users of the entity ‘s fiscal statements. The treatment paper provides an illustration in chapter 2 ( 2.16 ) whereby it states that an aircraft rental provides of import information to the users of fiscal statements of an air hose company, but does little to supply involvement for users of a consumer ‘s merchandises company.
The 2nd statement against inclusion of non-core assets is the fact that the costs associated with recognising and mensurating the assets and liabilities originating from non-core plus rentals overshadow the benefits. Costss would include professional costs such as legal and accounting costs.[ 5 ]
There are besides several principles in back uping the inclusion of non-core assets. The first is that diverse entities may construe the significance of non-core assets otherwise, thereby cut downing comparison for users. Second, non-core plus rentals may give rise to material assets and liabilities. Users are likely to be interested in material assets and liabilities whether they arise from rentals of non-core assets or from rentals of nucleus assets.[ 6 ]
Further on, it can be argued that all assets are indispensable to the operation of a concern. If an plus is non required for the concern to run efficaciously, why was it obtained?
From the two positions, we would rede the board to include non-core assets in the range because it is indispensable to non compromise the quality of the criterion for the interest of salvaging costs, while it besides provides users of GPFRs a clearer image of the company ‘s place.
The intervention of ‘short-term rentals ‘ should be similar to that of ‘non-core assets ‘ . Even though a rise in costs is likely, ‘short-term rentals ‘ may be material and utile to users of GPFRs. By excepting this in the range, it may besides actuate concerns to do an attempt in changing their rentals as short-run in order to derive benefits ( by doing rentals ‘short-term ‘ , it classifies the rental as an operating rentals and hence can non be stated in the balance sheet ) .
From the above considerations, it is advisable for the board to take the first attack in establishing the range on the bing one, nevertheless some alterations are recommended, though non to the extent of the 2nd attack ( full reconsideration of range ) .
RIGHTS AND OBLIGATIONS
The board proposes to implement an attack to lessee accounting that would compel the leaseholder to recognize an plus stand foring its right to utilize the chartered point for the lease term ( the right-of-use plus ) , while besides recognizing a liability for its duty to pay leases.[ 7 ]
By following this attack, it is advantageous for users of GPFRs because the IASB Framework represents the construct that GPFRs should supply information that is utile for decision-making intents. A ground why it is utile for users is because the execution of the measuring position indicates that all rights and duties are required to be shown on the statement of fiscal place and non in the notes[ 8 ]. This may be utile to many users of GPRSs who do non to the full understand the constructs or structural demands of GPFRs ( eg. being incognizant of ‘notes ‘ in studies ) . Therefore it will supply them will a clearer image of the company ‘s place.
The current rental criterion AASB 117 provinces that certain demands are needed to be met in order for a rental to be classified as a finance rental, and accordingly be show on the balance sheet. This means some operating rentals are kept ‘hidden ‘ from users of GPFRs. IFRS 3 shows an illustration of the proposed method where the definition of control Centres on rights instead than how much of a subordinate is owned, despite of whether the control is obtained by keeping 50 % of the subordinate or 99 % of the subordinate.[ 9 ]
Reasons for non following this attack are far and few, one could perchance be reasoning that this alteration is cardinal to the range, and therefore will be dearly-won to implement and could perchance be hard to accommodate.
It is apparent to us that the proposal is advantageous to users of fiscal statements.
INITIAL AND SUBSEQUENT MEASUREMENTS
The following proposal issued by the board is to ab initio mensurate the leaseholder ‘s right-of-use plus at cost utilizing the leaseholder ‘s incremental adoption rate, while implementing an amortised cost-based method to subsequent rating of both the duty to pay leases and the right-of-use plus.
Some companies have responded by stating the allotment of costs to the right of usage plus and other sums would be complicated, particularly if the allotment would be made on the footing of the estimated hereafter comparative just values or selling monetary values discounted utilizing the incremental adoption rate.[ 10 ]
On the contrary, ab initio mensurating the leaseholder ‘s right-of-use plus at cost would be consistent with accounting for similar assets ( i.e. , an ownership involvement that portions a similar right to utilize ) and is consistent with the proposed method and operable. Since the cost of the right-of-use plus will be an appropriate appraisal to its just value at the origin of the rental, accordingly necessitating leaseholders to ab initio mensurate the right-of-use plus at cost will supply users of GPFRs with similar information to mensurating the plus at just value at the origin of the rental.
In footings of amortised costing for subsequent measuring, it shows the funding costs inherent in a rental contract whereby the leaseholder reimburses for its right to utilize the leased plus over clip as involvement disbursal. The demand for ongoing just value measuring of the duty to pay leases would besides be conflicting with the initial measuring of those sums and besides conflicting with the manner similar liabilities are dealt.[ 11 ]
Therefore, we agree with the board ‘s proposal on mensurating both initial cost and subsequent costs.
Options to Widen or End a Lease
The board proposes the leaseholder should recognize an duty to pay leases for a declared rental continuance, ( i.e. , in a 10-year rental with a pick to lengthen for another 5 old ages, the leaseholder needs to take whether its liability is an duty to pay 10 or 15 old ages of leases. ) The boards tentatively decided that the lease term should be the most likely lease term.[ 12 ]
Some would hold that this attack is better to turn toing uncertainness about the rental continuance through measuring, i.e. utilizing an expected result attack to measuring.[ 13 ]The expected result attack could ensue in the leaseholder recognizing an duty to pay leases that does non reflect a possible result. Furthermore, mensurating the likeliness of the exercising of a reclamation option may be complex. This is extremely conflicting for users of GPFRs as they can non derive a dependable apprehension of the current province of the duty.
Under the present accounting theoretical account, some reclamation periods ( i.e. , deal reclamation periods ) are integrated within the initial lease term to avoid the possible equivocation of the capitalisation standards. Those anti-abuse demands would non be required in a theoretical account that acknowledges wholly right to utilize assets and rental duties where there is non an “ all or nil ” threshold for acknowledgment.[ 14 ]
Another statement is that an ‘option ‘ differs in economic substance from a non-cancellable committedness, because an option is an entitlement but non an duty, to go on a rental. Integrating the option periods within the lease term would exaggerate both the duty under the rental and the right to utilize plus, and therefore the kernel of the understanding would non be to the full represented, intending it would non supply applicable information to users of the GPFRs.
For this ground, we disagree with the board ‘s proposal and believe that information about options are economically valuable and would be utile to user. Therefore options should be recognised as assets and disclosed within the notes to the GPFRs.