A) What Is The Theoretical Basis For The Accounting Standard That Requires Certain Long-term Leases To Be Capitalized By The Lessee?

2 Answers

Rajan Vishwakarma Profile
Rajan Vishwakarma , What are Accounting Standards and why do they matter?, answered

What
are Accounting
Standards
?

Accounting standards exist to ensure that
accounting decisions are made in a unified and reasonable way for effective
functioning of the businesses and capital markets. The most important role of
accounting standards is the universality that they bring to financial record
keeping of both the government as well as non-government organizations.

They are designed to enforce transparency
which is especially important in the case of public entities, including the
governments or publicly traded companies. The standards enable investors to
make comparisons on a like-for-like basis and provide assurance that key
elements of a company’s financial controls and systems have been assessed and
reported on.

Why
use accounting standards?

The International Financial Reporting
Standards (IFRS), which was developed by the International Accounting Standards
Board, are a set of accounting rules followed by, or being adopted by more than
100 countries. All the listed companies operating in and from the European
Union member nations are required to use IFRS after the 28-nation bloc adopted
them in 2005. Meanwhile in the US, these standards are called the generally
accepted accounting principles or GAAP, the set of standards, guidelines and
procedures developed by the Financial Accounting Standards Board and are to be
used when accounting for the affairs of most governmental and non-governmental
bodies.

Recent reports reveal that all other major
economies have initiated a process to consider convergence or adoption of IFRS
in the coming future. Since 2007, even the US has allowed the cross-listed
firms on the country’s stock markets to file statements prepared under IFRS.
Due to the increasing globalization of financial markets and of companies, the
use of a single set of financial reporting standards across countries also
reduces the cost of preparing the consolidated financial statements of groups
made up of companies conducting business worldwide.

Experts suggest that without accounting
standards, an investor who has studied the financial statements of a large
publicly traded company would not know whether to trust the findings on those
statements. Standards mean that taxpayers can see how their tax dollars are
being spent and regulators can ensure that laws are followed.

A practicing or a prospective accountant
both need to have a thorough understanding of the accounting principles and
standards while preparing the financial report of a government or private
entity. However, if a person is simply preparing individual income tax
statements, understanding of these standards probably isn’t as important.

IFRS
accounting standards:

Some of the most important IFRS are listed
below in order of their relevance:

IFRS
1: First-time Adoption of International Financial Reporting Standards

IFRS
2: Share-based Payment

IFRS
3: Business Combinations

IFRS
4: Insurance Contracts

IFRS
5: Non-current Assets Held for Sale and Discontinued Operations

IFRS
6: Exploration for and Evaluation of Mineral Assets

IFRS
7: Financial Instruments: Disclosures

IFRS
8: Operating Segments

IFRS
9: Financial Instruments

Matt Powell Profile
Matt Powell answered
A liability is an obligation to pay funds in the future (for example debt with a bank).  A long term lease is also an obligation to pay funds in the future and so, some argue, should be shown as an liability also.  Otherwise when looking at the balance sheet what is essentially a commitment to pay funds in the future is not recorded anywhere.

In terms of the asset itself it is being held long term and so the organisation has the rights and benefits of that asset for a long period of time, just as it would if it had bought it outright.  If the organisation uses the asset in this way it should, some would argue, be recorded as an asset on the balance sheet.

Answer Question

Anonymous