Corporate Accounting In the Leasing Process

Question: Discuss about the Corporate Accounting for the Leasing Process. Answer: 1: (a) In the leasing process lessor allows use of certain assets in lieu of the rent amount. This is a perfect example of the finance lease where Salohcin Ltd leased asset is a specific item of industrial machinery, portable Enamel Drying Room to Ffoeg Ltd, for a period of 4 years. The asset was actually purchased by the lessor and then given on for lease to Ffoeg Ltd for an annual rent of $1,20,000. The owning of the assets and then leased out is considered as the finance lease according to Statement of Standard Accounting Practice 21. (b) Total lease receivable is $1,00,000 x 4 = $4,00,000 The annual lease payment of $20,000 towards insurance and maintenance is not considered here. The present value of lease receivable at the inception of the lease will be $4,00,000 x 3.106= $ 12,42,400. (Assumed that, first lease payment will be due on 30 June, 2006) (c) Date Annual Lease Payment Executory Cost Interest (20% on Liability) Reduction of Lease Liability Lease Liability 30.06.2006 349,160 30.06.2006 120,000 20,000 100,000 249,160 30.06.2007 120,000 20,000 49,832 50,168 198,992 30.06.2008 120,000 20,000 39,798 60,202 138,790 30.06.2009 120,000 20,000 27,758 72,242 66,548 480,000 80,000 117,388 (d) Journals in the books of Salohcin Ltd (Lessor) 30.06.2006 Direct Cost Dr. 15000 Cash Cr. 15000 Cash Dr. 120000 Lease receivable Cr. 100000 Insurance and Maintenance Cr. 20,000 29.06.2007 Interest Receivable Dr. 49832 Interest RevenueLeases Cr. 49,832 (Salohcin Ltd recognizes the interest revenue earned during the first year through the following entry) 30.06.2007 Cash Dr. 120000 Lease Receivable Cr. 50168 Interest Receivable Cr. 49832 Insurance and Maintenance Cr. 20000 29.06.2008 Interest Receivable Dr. 39798 Interest RevenueLeases Cr. 39798 30.06.2008 Cash Dr. 120000 Lease Receivable Cr. 60202 Interest Receivable Cr. 39798 Insurance and Maintenance Cr. 20000 29.06.2009 Interest Receivable Dr. 27758 Interest RevenueLeases Cr. 27758 30.06.2009 Cash Dr. 120000 Lease Receivable Cr. 72242 Interest Receivable Cr. 27758 Insurance and Maintenance Cr. 20000 01.07.2009 Cash Dr. 10000 Gain on Sale of Leased Equipment Cr. 10000 (e) The Portion of the balance Sheet of Salohcin Ltd (Lessor) For the year 2006 Non-Current Assets (Investment) Lease receivable (249160-50,168) $198992 Current assets Interest receivable $49832 Lease receivable $50168 The Portion of the balance Sheet of Salohcin Ltd (Lessor) For the year 2006 Non-Current Assets (Investment) Lease receivable (198992-60202) $198992 Current assets Interest receivable $39798 Lease receivable $60202 2: Introduction: The discussion paper on Initial Accounting for Internally Generated Intangible Assets by the Australian Accounting Standards Board office was represented by Robert Keys and Dean Ardem. The Assets are broadly classified as Tangible Assets and Intangible Assets. Tangible assets are those that we can see and feel or which is having a physical existence like Plant Machinery, Land and Building, Motor Vehicles, Office equipments, etc while Intangible assets are those which we cannot see physically but can be only realised or understandable as in non-physical form or otherwise as mentioned in the AASB 138/IFRS 3 as an identifiable non monetary asset without any physical existence like; Research and development by any company turning into internally generated intangible assets. Customer related intangible assets like Customer contracts, customer relationships, non contractual customer relationships, customer lists, etc. Contract related intangible assets like lease agreements, licensing agreements, broadcast and operating rights, etc. Marketing related intangible assets like internet domain names, newspaper mastheads, trademarks or trade name, etc. Technology related intangible assets trade secrets, computer software, patented technology, unpatented technology, databases, etc. Arts and culture related intangible assets are like literary works, television programmes, playwrights, copyrights, etc. The valuation Process: It is mentioned that only purchased capital items will not be considered as assets in the business but when an assets is created internally over a long period of time is also be termed as an assets and also known for its asset bearing features like it gives future benefits to the business and in the long run business gets to use this as an asset with different benefit bearing capacity. The report also says that there is a close association between the generation of assets and expenditure incurred but always they may not coincide with each other but may have separate existence (aasb, 2009). The large biomedical company making huge expenditure in their research and developments work is not in any single year or period but for the period which is stretched for some time or many years. The main purpose of the high expenditure in research and development is with the purpose of making great breakthrough in more vivid biological and medical discoveries that may be used for further betterment of human life or creating a better environment for mankind for getting over the medical or biological disadvantages the society is under. The internally generated assets may be a result of or arising out of planned usage of development and research phase of an internal project (charteredaccountants, 2016). The cost capitalisation is a mechanism followed for initially recognising different types of internally generated intangible assets under valuation based model. The cost thus capitalised may be adjusted to fair value during reporting time just by making it a certain step for accounting instead of measurement of such assets. This process may affect impairment of capitalised research and development costs other than research and development expenses. Under cost based model historical cost measurement is followed for internally generated assets. Cost based model is not a value indicator but may be used for initial measurement. Under fair value based model is used to determine the value for which the asset could be exchanged. Internally generated assets are of two types Planned assets and unplanned assets. By this manner the feature of such assets are determined for expected future economic benefits and control (DellAtti Pastorelli, 2006). Recognition of the internally generated assets is done if it helps in future economic benefits and the cost of value can be measured with all possible reliability. AASB 138, paragraph 21(b) refers that cost based model is best used for initial recognition of internally generated intangible assets. The future economic benefit to the company should flow from the assets. In the paragraph 22, it is clearly stated that the probability of expected future economic benefit should be valued based on the estimates of the management. AASB initially recognised that, intangible assets internally generated can be valued on fair value. Research costs are always in general concept incurred under IASB with a view to give rise to an asset which has ultimate potential to grow for national interest. Conclusion: The possible advantages and disadvantages of recognising internally generated intangible assets under AASB 138 will be as stated below; The main advantages of internally generated intangible assets is that the assets can be used in deferred manner to generate long term benefits in the business as a going concern which means that till the business is in operation. Another advantage of internally generated intangible assets is that it is in consistent with accountability of management enabling an assessment. The main disadvantages of not recognising internally generated intangible assets are that such assets will have high uncertainty in relation to future treatment of such assets; partial lack of control or excludability, non-recognition can cause serious harm problem and non-tradability. 3: Genesis of the amendment The main objective of the financial reporting is to have basic system of financial information and database for the purpose of control which will be useful to all stakeholders particularly investors existing and new , other creditors , lenders for making or taking decisions. All stakeholders like investors, lenders, creditors, taxpayers, other contributors are members of the community as a whole who wants basic information from all business where they have share and interest. For example that any new decision by parliament may be taken on the basis of information available from an industry so that the taxpayer can also take decision if they need to represent any such entity, also on such information will depend if the government can fund such entities or not. Suppliers will be also using such information to decide to supply further or not and mostly such information is very much useful for investors making investment for further growth of the entity. The net cash inflows for future projection are very important for potential investors as well for existing investors. The general information of an entity is required for the purpose of financial reports which will help to determine the future net cash inflows which will help creditors, lenders, investors, management, board of directors, etc. Financial reports used by management or board are always not useful to all stakeholders like existing and potential investors, lenders, creditors, etc as such reports will be presented to them by making it understandable to them. General purpose of financial reports is to provide all information to existing and potential investors, lenders, the creditors, management and governing board. All individual information seekers from a business have very different purposes (aasb, 2016). Main requirements prescribed by the amendment Economic resource and claims of an entity can help all users to find out the business entities financial strength and weaknesses and such information is very useful to determine the liquidity and solvency status of the entity. It also helps to determine if the entity is required to be financed additionally and if such finance is provided then the entity will prosper to what level and what way the finance will also arrive to the entity. Economic resources and claims determine future cash flows as a result of various outstanding like accounts receivable, etc. Different cash flows may come from several other resources to market and produce goods and services to various clients and customers. Financial performance determines the quantum of return an entity generates and such information is very much important to determine how the management faired to run the entity in the best possible manner. All details and information about the variability and return components will be required to be taken heed of (aasb, 2015). Financial performance is very much detailed by accrual accounting which is a reporting format for entitys economic resource enhancement. The effects of cash receipts and payments taking place in different periods are part of accrual accounting. Information about the entities about cash inflow and outflow, repayment of debt, general cash payments and dividends, repayment of debts and borrowed money determines the entitys operations, assessment of its liquidity, solvency and interpretation about financial performance. The consequential effects of the amendment The financial reports will furnish entitys economic information on its economic resources and conditions. The qualitative characteristics of useful financial information justify the types of information those are extremely useful to lenders, other creditors, existing and would be investors. A few financial reports included self explanatory material information which is just meant for management and board to take decisions for the future operations of the business. The financial information must be understandable, verifying, useful and present on right time and also comparable with previous similar periods for better analysis of the entire financial information provided in such reports for those particular entities (charteredaccountants, 2016). Faithful and relevant financial reports and statements are most important which are useful for taking decisions on the basis of values confirmed and predicted or anticipated. The anticipation value is used to look into the future of the entitys financial status and determines the future financial condition or say outcome of the financial impact in future. The reports should be faithful in nature which means that the reports can be error free, complete and correct or neutral. The reports should be absolutely transparent so that the management can be able to maximise the qualities achieved. Neutral report should be like unbiased reports without any partial inclination. Complete report means like reports with all basic data required understanding the entity correctly. Error free report means freeness from all possible unwanted errors. Thus Faithful report means exact report error free and perfectly accurate. References: aasb, 2009. Intangible Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_COMPjun09_07-09.pdf [30 Augustus 2016]. aasb, 2015. Conceptual Framework for Financial. [Online] www.aasb.gov.au Available at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [30 Augustus 2016]. aasb, 2016. Conceptual framework. [Online] www.aasb.gov.au Available at: https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx [30 Augustus 2016]. charteredaccountants, 2016. AASB 138 Intangible assets. [Online] Available at: https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-138-Intangible-assets?standard= [30 Augustus 2016]. charteredaccountants, 2016. Conceptual framework. [Online] www.charteredaccountants.com.au Available at: https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Current-issues/Conceptual-framework.aspx [30 Augustus 2016]. DellAtti, A. Pastorelli, E.S., 2006. ACCOUNTING FOR INTERNALLY GENERATED INTANGIBLE ASSETS ACCORDING TO AASB 138. [Online] www.academia.edu Available at: https://www.academia.edu/11781988/ACCOUNTING_FOR_INTERNALLY_GENERATED_INTANGIBLE_ASSETS_ACCORDING_TO_AASB_138 [30 Augustus 2016].