Running head: ACCOUNTING STANDARD FOR LEASE Accounting Standard for Lease PART AAnswer(i): AGL Energy Ltd has made a decision that the company will concentrate overprojects related to core gas and will divest non performing Gas assets whichare less significant and non-core activities. The core and significant projectswhich AGL Energy is planning to retain includes recently incorporated NewCastle Gas Storage Facility, Wallumbilla Liquefied Petroleum Gas plant,Silver-Springs underground storage facility, Gloucester Gas project and CamdenGas Project (Kabir, Rahman & Su, 2017).
It will enable the company toenhance various small gas projects which include strategically significant gasstorage along with preventing huge capital expenditure. It will help inreleasing No Performing as well as allow the management for enhancing value ofshareholder through the group.Answer(ii): According to AGL Energy, the present impairment approach leads to lowcomparability in accounts. Also the impairment testing for goodwill hasrestricted relevance and effectiveness, according to the intensity ofsubjectivity which is involved. The Annual testing method is extremely timeconsuming and complex which involves a lot of assumptions and judgements. Inmany of the cases, effort and time which is spent over the exercise andactivity was explained as important in comparison to other domain whichconcerns financial reporting, though the advantage was questionable (Huikku,Mouritsen & Silvola, 2017).
This can have a significant impact over theindividuals who spend good time observing analysis and disclosures of companieswith respect to impairment testing of goodwill.Answer(iii): AGL energy performed an explanatory review for natural gas assets whichare categorized as evaluation and exploration assets, equipment’s and plant,property and gas and oil assets, as on December, 2015. As a consequence, AGLidentified impairment charges and expenses of approx. $795 million prior to taxin Group operations segment. The reduction in prices of global oil had asignificant impact over long term gas prices of Queensland which led toimpairment for natural gas Assets of AGL in Queensland (??????, 2015). This impairment expense also consists of $50million which is related to increment in provision of rehabilitation ofenforcement and lower inventory value for projects of gas operations.Answer(iv): An impairment test values and measures whether item of balance sheet isof the amount which is stated and mentioned over the balance sheet.
The amountof balance sheet must be lowered if the test of impairment shows a reducedvalue. Impairment testing is applied and implemented for tax accounts andcommercial accounts. Various nations, tax jurisdictions and accounting standardscan have varying rules over what needs to be tested, how and when. It can berelevant for conduct and performing more recurrent impairment testing insteadof justice value of reporting unit which is lowered below carrying the prices(International Accounting Standards Board, 2004). Instance of catalyst eventsinclude losing the key employees, regulatory changes, lawsuits as well asexpectations of reporting unit that will be sold.Answer(v): There is a lot of subjectivity which leads to opportunistic behaviorbetween the management while Impairment testing of goodwill. Since allocatinggoodwill in cash generating units as well as to calculating the recoverableprices is subject to the allowance and discretion, the studies explain thatmanagement of a company takes action opportunistically regarding Goodwillimpairment testing.
The management andits remuneration framework affects possibility of Goodwill impairment (Kabir,Rahman & Su, 2017). Except few intangible assets and goodwill, where it ismandatory to have an impairment testing annually, the entities are needed toperform impairment tests if an indication or sign for impairment of asset isthere.Answer(vi): Impairment of Assets ensures and makes sure that the assets of thecompany are not used and utilized at not more than the recoverable prices whichis more of its fair price minus value in use and disposal costs. Except fewintangible assets and goodwill, where it is mandatory to have an impairmenttesting annually, the entities are needed to perform impairment tests if anindication or sign for impairment of asset is there. The impairment can beperformed for unit that generates cash where the asset may not generate inflowsof cash which are primarily independent and exclusive from all other assets(Capalbo, 2013).
Answer(vii): In order for AGL energy to make transformation occur in the sector ofenergy, operating models needs to be altered as well as new foundations oforganization are required to be developed. To thrive and survive in the dynamicindustrial market environment, the company is developing agile systems andprocesses of business capable for adapting and anticipating it for takingbenefits of the chances and opportunities. The structure of organization of AGLEnergy is enabling the internal changes in culture.
The organization iscreating a growing and deep pool of talent for conducting impairment testing (“AGL | Electricity Providers | Gas Suppliers |Solar Energy | AGL”, 2018). The business definition of AGL energyinvolves harnessing insights for enriching the energy experience of customers. Answer(viii): Underlying Operating Earnings Before Interest and taxes and profits areknown as statutory profit or loss and statutory earnings before interest andtax respectively that are modified for changes which are made in fair valuemeasurement for the financial instruments. As per AGL Energy the UnderlyingOperating EBIT and Profits give a good explanation of the financial statementsand it allows for much relevant and reliable comparing of the performance offinancial statements between the financial time period. The significance ofUnderlying Operating EBIT and Profit lies in the fact that they help inremoving items which are relevant items of expense or revenue which are notlinked with the activities of business and help in facilitating comparisonbetween time period of varying financial performance (Capalbo, 2013). It alsohelps in removing the changes and alterations in fair value measures offinancial instruments which are identified in profit and loss statement forremoving the volatility which is developed by variations in valuations ofderivatives as well as underlying assets. PART BAnswer (i): The Chairperson ofthe IASB trusts that the previous bookkeeping standard for leases (AASB 117/IAS17) did “not reflect monetary reality.
In his speech he said that as perthe present requirements of accounting, more than 80 percent of leases areeither not maintained over the balance sheet, or they are mentioned asoperating expenses. No matter, the operating leases are not mentioned inbalance sheet, they still develop true liabilities. IFRS 16 will make sure thatall the leases virtually are recorded on balance sheet of the company. It canmean that both operating leases that are presently included only in footnotesof statements of finances and finance leases that are recorded over balancesheet of the company will be maintained over the balance sheet like liabilitiesand assets (Öztürk & Serçemeli, 2016). There will be no categorizationof leases into finance or operating leases. Instead it will be a competitiveoption which will give flexible capital and finance expenditure keeping asideall the risks related to full ownership of asset and technology obsolescence. IFRS16 will consider all the issues and will recognize and identify all the leasesas liabilities and assets, which will better help reflecting the true economicreality.Answer (ii): For many years, corporations have harassedloophole of financial accounting by making structures of transactions relatedto lease to account them into operations leases.
It led them to preventrecognizing liability for lease over the balance sheet, and hiding and veilingtheir debts. The SFAS 13 (Statement for standard of Financial accounting)required the companies with capital leases for reporting a lease asset andliability over the balance sheet (Mellado & Parte, 2016). This rentingstandard assumes away their concealing position to shroud obligation for leasesover a year. Also the criteria for categorizing the lease which the companiesuse for preventing lease capitalization and turns steps for hiding theliabilities of lease off the company balance sheet to a useless exercise.Unfortunately, the creative lessors and lessees created a cottage marketindustry or place where the lessees may get the financed assets easily and alsoprevent recognizing the lease liability over balance sheet. IFRS 16 may notalter the leases nature but the accountancy needs. It can be interpreted thatleases can be a flexible source and attractive source of finance for theorganizations who do not want to stand the risk to own the equipment fleets andpremises.Answer (iii): As per the current Accounting standards whichare used for the leasing arrangements, the information regarding theundiscounted promises of company for the leases recorded off balance sheet isgiven in the footnotes section of the financial statements.
Thoughsophisticated investors and stakeholders may make use of this information forestimating liabilities and assets which arise from these leases, a lot ofinvestors such as retail investors cannot make these analyses. These newaccounting standards for leases will thus make a more levelled and balancedfield for all the corporations such as airline companies. It will also resultin making strong the confidence of market (Edeigba & Amenkhienan, 2017).
The investors will also be able to see these leases being recorded over thebalance sheet of lessees and will get a complete and fulfilled picture oflabilities and assets which are utilized in operations along with the leaseexpenses which are unavoidable. It will help and aid investors to compare andbetter evaluate the financial operating and leverage flexibility incorporations. Answer (iv): As per IFRS 16, the companies withcapital leases need to report their lease asset and liability over the balancesheet. This requirement to report for capital the lease as well as the influenceit will have over the balance sheet will make them undesirable in comparison tooperating lease. A company having capital lease along with displaying correctasset use, the liabilities for operating lease will be displayed by the balancesheet that may impact the leverage ratios and appearance of the balance sheet.Consequently, the creditors and investors may alter or modify their financialhealth perception regarding the company (Rapoport, 2013). For most of theorganizations, this change can make leasing activity less attractive incomparison to buying the real estate, since the liability will be shown in thebalance sheet in both the ways. It can give the extra incentive relevant forthe corporations for taking the leap as well as buying the building.
Thisleasing standard takes away their hiding place to hide debt for leases morethan a year. Also the criteria for categorizing the lease which the companiesuse for preventing lease capitalization and turns steps for hiding theliabilities of lease off the company’s balance sheet to a useless exercise.Answer (v): Since the former standard for accountingfor lease does not record the capital leases in the company’s balance sheet, itcreates problems as the financial analysts and information investors do not getthe correct information from the company’s balance sheet and it does notreflect a true economic reality. It can cause understating the liabilitiesbecause a company can have many assets in agreements of operating lease whichmay not be unveiled in financial statements. For clearing this issue, theanalysts and investors should make efforts for adjusting the balance sheet asper the information they have like using present value. Therefore it can beestimated that investors prefer and rely over transparent framework which givesmore precise reflection about the liabilities of the companies and alsomaintain the consistency over worldwide platform (Lin & Graham, 2017). Thelatest modification related to reporting of each and every lease will help in leadinga better and informed decision for investment by the investors as well as towardsa balanced decision for leasing versus buying capital assets by the managementof a company. IFRS 16 may also help in improving the allocation of capitalwhich is adequately beneficial for growing economy.
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