Maa363 Corporate Accounting & Building Assessment Answers

Answer:

1. Determine whether a lease exists according to AASB16 Leases

The concept of a single lessee accounting model and requirements to recognize the assets and liabilities in the books of the lessee were introduced by the AASB 16, leases, issued by the Australian Accounting Standards Board.

In this case the contract, between A Ltd. and B Ltd., conveys the right to control the office equipment for a period of 6 years in exchange of periodic consideration, i.e. annual payment. Thus, there exist a lease in the contract between A Ltd and B Ltd.

1. Describe four disadvantages of B Ltd for entering into this lease agreement.

The four disadvantages of B Ltd. for entering into this lease agreement are mentioned below:

1. Instead of six years the lease period should have been for 8 years.
2. The annual lease rental is high due to the short period of lease term. Had the lease agreement been for 8 years the annual lease payment would have been lower.
3. The guaranteed residual value of the leased asset by the lessee is higher than the estimated residual value of the office equipment at the end of its economic life.
4. In case of default in annual lease payment A Ltd. can retrieve the equipment.   
5. Prepare a lease schedule (lessee) for the lease contract.

1. Prepare all journal entries to record the relevant transactions on 1/7/2016, 30/6/2017 and 30/6/2022 in the records of B Ltd.

Discuss how your solution in Part A would differ if, instead of a guaranteed residual value, the contract contains a:

1. Bargain Purchase Option

If instead of guaranteed residual value the contract between A Ltd. and B Ltd. contains bargain purchase option then the lease shall be classified as capital or financing lease. In such case the lease must be disclosed in the Balance sheet of the lessee. Prevention of off balance sheet financing by the lessee it has been made mandatory to record the lease in the Balance sheet.  

1. Unguaranteed Residual

Explain the new single accounting model for lessees and the implications of this change:

What is the new single accounting model for lessee?

AASB 16 has introduced the concept of the new single accounting model which requires a lessee to recognize assets and liabilities in the books of accounts in respect of all lessees with a term in excess of 12 months.  

Implications on the following:

External users of financial reports

External users of financial reports will be able to assess the financial position and financial performance of an organization better. The single accounting model for lessee will ensure that the users of the financial reports will be aware of all leases which will have term periods in excess of 12 months. Thus, even in case of operating leases also as long as the lease is for a term in excess of 12 months the users of financial reports will be able to make out the presence of such lease with the appraisal of financial reports (Zadek et al., 2013).

Statement of Financial Position

The statement of financial position will be reflected better as the single lessee accounting system will ensure proper disclosure of leased assets and liabilities with all leases in excess of 12 months term period. Thus, the Balance sheet will reflect the true and fair financial position in terms of lease agreement with introduction of single lessee accounting system.

Management contracts tied to key performance indicators

Since the Balance sheet will recognize all leased assets and resultant liabilities for lease agreement with term periods in excess of 12 months management contracts tied to key performance indicators such as return on assets will also be influenced as the balance sheet will contain leased assets in addition to other assets which will be considered for calculating the return on assets. Thus, the quantum of return on assets will be affected due to the new single lessee accounting model (Bhasin, 2015).  

Debt covenants

The implications on debt covenants subsequent to the introduction of the new single accounting model for lessee in AASB 16, Leases, issued by the Australian Accounting Standards Board are as following:

1. The debt agreement shall be maintained properly as the lease agreement is also a formal debt.
2. Financing lease and operating lease will be recognized in financial statements will influence the debt covenants.  

Reference

Zadek, S., Evans, R., & Pruzan, P. (2013). Building corporate accountability: Emerging practice in social and ethical accounting and auditing. Routledge.

Bhasin, M. L. (2015). Corporate accounting fraud: A case study of Satyam Computers Limited.