Lease Accounting

Question: Write an essay on changes in Lease Accounting and It's Effect. Answer: Lease accounting has always been a point of discussion amongst various accountants. The principles for lease accounting to be followed for a particular transaction by an organization always been a debatable question. Changes to lease accounting described in IFRS 16 will not be welcomed by all. It is perceived that such changes in the accounting of leases method may lead to defaults on the debt covenants. There are two kinds of leases- Operating and financial. Operating lease is the most popular of the two as it helps to keep the balance sheet lighter from its debts. Operating lease is said to be a form of Off- balance sheet funding (Sherman, ,2014). The balance sheet does not account for the operating lease entered by a firm. Thus the users of the financial statements have to go out of their way in adding to the companies liabilities the lease payments it is required to make so as to get a clearer view of the companys debt position. However the information regarding the operating leases provided in the notes to accounts are not sufficient enough to serve the purpose. Because of this the IFRS 16 came into force. The financial reporting suggests that the leases should be accounted for in the balance sheets of the companies. The changes will not be popular specially amongst franchisees as the standard requires the recognition and the recording of the lease at the time of its commencement using a discounted method for the future lease payment. The franchisees however renew their lease agreements on the basis of requirements and if the same is not renewed in any particular year then it would put an unnecessary burden on the balance s heet of the company (Pollack, 2013). It is this pressure which will make this standard less popular. The balance sheets of the companies would apparently look more risky affecting the debt equity ratios also. It would lead to a scenario wherein the business houses will have to re-negotiate their debt covenants to safeguard themselves from the brunt of the accounting changes for leases. The lease agreements are generally for a period of as long as 99 years also and discounting the same at its NPV is an impracticable task (Weinstein , 2016). The cost versus benefit clearly shows that the companies have to account for around $2 trillion to their liabilities. Banks grant loan basis the debt equity ratios and this methodology will disturb the entire cycle and may even lead to banks demanding for higher rates of interests or demand for early repayment. This may disrupt the entire income expense cycle of business houses hurting the pockets of consumers, employers and all others who are directly or indirectly associated with it (Bennett, 2014). Due to this fear and expected heaviness of the balance sheet which would lead to liquidity issues, confidence lacking amongst the investors and in some cases also insolvency the new methodology of lease accounting is less popular with everyone.