ASSIGNMENT:
The overarching objective of GPFR is decision usefulness, supported by relevance, reliability and comparability. The desire to achieve comparability and (by implication) consistency over time is the reason to have reporting standards (Schipper 2003). There has however, been widespread and longstanding criticism that accounting rules fail to disclose information, or present it in ways that users are unable to incorporate in their decision-making processes (Mackintosh, 2006; Pozen, 2007). Too often accountants and researchers operate within the parameters set by the standard setters, rather than questioning and challenging them.
This criticism became more pronounced in the wake of the Global Financial Crisis (GFC) when a number of reports, including those from the Financial Stability Forum (2008), the Turner Review (2009), and the Congressional Oversight Panel (2009) warned that accounting rules facilitated various forms of off-balance sheet financing (OBF). These reports linked the GFC to OBF as regulators and other equity market stakeholders were misled regarding the level of risk faced by reporting entities.
Leases are a significant financial commitment to an entity, but the fact that they are currently not reflected on balance sheets can present a misleading picture about leverage and the assets that the lessee uses in its operations. AASB117 has been heavily criticised for its inconsistent treatment regarding leases. The current distinction between finance and operating leases provides incentives to structure some transactions as operating leases, which has led to a significant increase in off-balance sheet financing.
The AASB and IASB issued an exposure draft on leases in May 2013 (ED242 and ED/2013/6 respectively). The exposure draft proposes that all leases, except for short term leases, be included on the balance sheet.
Critically evaluate and discuss whether the exposure draft is an improvement on AASB117 in terms of decision…