Posted: June 20th, 2022

ACCT6007 Financial Accounting Theory And Practice


Identify the corporate and social imperatives that are the foundation of the accounting conceptual framework

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Explain the relationship between accounting theory and the accounting conceptual framework.

You can work individually or in groups to identify and use appropriate accounting standards for a variety of accounting scenarios.



This report aims to evaluate how capital market participants use operating leasing in the off-balance sheets at the time of evaluating credit risk of the organizations.

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This study will examine the risks associated with operating lease.

The accounting information and how it is treated in the balance sheet will be addressed with respect to the operating lease.

The account standard setters accounts both the operating and financial leases in the same manner.

The existing lease standard results in asymmetry and inaccuracy regarding market information. This report will concentrate on the new accounting standard for leasing that has been released by IASB/FASB.

The AASB issued Accounting Standards 16 regarding leases. This standard requires that the lessee recognize both assets and liabilities for leases of > 12 months, unless the underlying asset value has been very low.

The present value is used to measure the assets and liabilities.

These are the fundamental characteristics of AASB 16, which deals with operating leases:

This measurement includes the payment for the non-cancellable lease as well as the optional period payments in the event that the lessee is certain that the option to extend the lease or terminate the lease will be exercised (Altamuro and al., 2014).

AASB 16 requires disclosures to be made for lessees.

AASB 16 requires the greater disclosure to be provided by the lessor to improve information regarding the risk exposures and specifically the risk associated with residual values (AASB Standard, AASB 16 Leases, 2017).

Spencer and Webb: Analysis of the Literature

Over the last 30 years, accounting for corporate leasing activities has been a subject of discussion and examination.

The IASB (International Accounting Standard Board), as well as the FASB, are currently implementing standards to modify financial reporting in relation to operating leases. These are currently reported as an off-balance sheet item.

Spencer and Webb (2015) analyzed the existing literature to predict the impact of any alteration. (Bratten Choudhary, Schipper, 2013).

To understand why the firm engaged them in operating leases, and the impact of the information on users, they reviewed the existing studies.

They also looked at the reports that directly relate to leases.

According to the report, companies engage in off-balance sheets activities for leasing in part for managing the presentation and financial statements (Andrade Henry & Nanda 2014).

According to the other study, the companies should use operating leases to manage the cost and preserve capital.

The study found that credit rating agencies, lenders, and other capital market participants should be able to understand off-balance sheets leases and take them into consideration when making decisions (Callahan Smith & Spencer 2013, 2013).

Spencer and Webb also provided details about current proposals and the point of divergence between the IASB and FASB that included the segregation and expenses related to operating leases.

FASB recommended reporting both the single and combined lease expenses. IASB recommends that the amortization elements be separated from interest and the interest.

The expenses associated with operating leases have not been considered as important.

The existing studies indicate that it is important to disaggregate information regarding the operating and financing activities.

As operating lease reporting standards are being debated, the review of the author can be useful to regulators (Spencer & Webb 2015).

AASB 16: Treatment of Operating Leases

Lease payments from operating leases must be recognized on a straight-line basis or on any other systematic basis.

If a more efficient method is used, the lessor may use any other systematic basis.

The expenses incurred to earn lease income must be identified by the lessor, including depreciation.

The operating lease must be obtained at the carrying value of the asset. The lessor must then add the cost of initial costs to the lease and recognize the expenses as an expense over the term of the lease.

The operating leases policy must not be incompatible with the lessor’s usual policy for depreciation of the same asset.

The AASB138 and AASB116 must be followed by the lessor in calculating the depreciation.

For determining if the underlying asset subject to the operating lease has been impaired, the lessor must use the AASB 136 and account for any impairment loss.

Because the profit from the sale of the asset is not equal to the sale, the dealer or manufacturer cannot identify it (AASB Standard-AASB 16 – Leases, 2017).

The modification of the operating lease must be considered by the lessor. It should also consider the accrual of prepaid lease payments with respect to original leases as part of the lease payments for the new lease.

The lessor must disclose information in the form of notes together with financial statement, cash flows, and profit or loss statements. This information provides the basis for users of financial statements to analyse the effect of leases on financial performance, financial situation, and cash flow of lessor (AASB Standard–AASB 16 – Leases, 2017).

Disclosure of Operating Lease

The disclosure objective of the lessor to disclose the information under the notes together with the statement for profit and loss, cash flow statement and financial position statement provides an idea about the assessment of the effect that leases have on financial situation (Muller Riedl & Sellhorn 2015).

The lessor must disclose amounts for the reporting period in relation to the selling loss, profit, financial income on lease investment and income with respect to variable lease payments. These are not included in the calculation of the net investment for lease.

Incomes from operating leases must be separately disclosed, as well as income from variable lease payments not dependent on the rate or index.

The lessor must also disclose additional qualitative and quantitative information about the leasing activities in order to achieve the disclosure objective.

This additional information includes details about the leasing activities and how the lessor has disclosed the strategy for risk management. It also includes the methods by which the lessor reduces risk (Kusano Sakuma and Tsunogaya (2015)).

These may include residual value warranties, buy-back agreements, or payments related to variable leases for the overlimits.

Operating leases are actually linked to credit ratings. The reliability of accounting information can have a significant impact on the risk associated operating leases.

According to Spencer and Webb, the credit rating was reclassified into seven categories. These range from AAA (1) up to CCC or lower (2).

The study’s main findings are that the operating leasing is relevant and has the same risk relevance as the finance lease if the disclosures are reliable (Financial Accounting Standards Board, 2016).

Reliability of accounting information can have an impact on operating lease risk relevance for the purpose explaining credit risk.

The present value method is used to estimate the amount of operating lease obligations. It assumes that the amount paid for leases is constant over the term of the lease, while the operating lease is constructively capitalized (International Accounting Standards Board (IASB), 2016,).

The payment amount of the lease decreases gradually if there are multiple lease contracts that were entered at different times.

The results of the AASB Standard – AASB16 – Leases, 2017) do not change despite the reclassifications of the constructive method for capitalization and credit rating.


The above discussion shows that operating leases are tied to credit ratings.

The credit ratings are determined in the same way for both finance and operating leases.

The risk approach to the finance lease is significantly different from the operating lease’s.

The capital market also indicates that an operating lease from the off-balance sheet will be considered when assessing credit risk and revealing it reliable.

The study also revealed the impact of capitalizing an operating lease on credit ratings.

Despite the useful insight provided by the operating lease disclosures, there are limitations to these disclosures.

It was discovered that accounting information’s reliability had significant impacts on the risk approach to operating leases through the use of the remaining lease contracts for the life with the proxy for reliable information.

The FASB (2016; FASB 2016) issued a new accounting standard that required lessees to recognize all assets roughly, such as the operating leases and finance leases under balance sheet.

These circumstances will impact the risk relevance of an operating lease’s operation lease.

This analysis gives more detailed information about the capitalization of operating leases.

Refer to

AASB Standard – AASB 16 Leases.

Credit assessments and operating leases.

Contemporary Accounting Research, 31(2): 551-580.

The effect of purchase obligations and operating leases on credit market prices.

Working Paper.

Evidence suggests that market participants evaluate recognized and disclosed items in the same way when reliability is not an issue.

The Accounting Review, 88(4): 1179-1210

The reliability and valuation implications of FIN 46 in relation to synthetic lease liabilities.

Journal of Accounting and Public Policy 32(4): 271-291.

Accounting Standards Codification (ASC), Topic 842, Leases.

International Accounting Standards Board (IASB), (2013).

Exposure Draft, Leases.

International Accounting Standards Board (IASB), (2016).

Evidence from Japan on the economic impacts of capitalizing operating leases.

Corporate Ownership and Control 12(4), 838-850

Muller, M.A., Riedl E. J., and Sellhorn T. (2015). Recognition versus disclosure fair values.

The Accounting Review, 90(6): 2411-2447.

Leases: A review and analysis of the current academic literature on lessees.

Accounting Horizons, 29(4): 997-1023.

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