Introduction:

The report is prepared to conduct review on findings generated from literature by researching on selected journal articles. The findings generated from analyzing the journal articles have been presented with its implications on the financial reporting of the Australian companies. For this purpose, two research papers have been selected relating to the accounting issues concerning lease. The research paper concentrates on the implication of the new lease standard on the reporting system and stakeholders. Two articles titled “The effect of new lease accounting rules on profitability analysis in retail industry experience” and “Bringing leased assets onto the balance sheet”. New lease standard is an important topic as the current lease standard has been highly criticized. The aim of research is to make a contribution on the lease proposal by collecting different perspectives addressing the criticism and ambiguity associated with the current lease standard.

Discussion:

Explaining the purpose of article one by exploring research question:

The journal article has been derived from the Journal of Corporate accounting and finance which has the research objective of determining the affect of new lease standard on the retail industry profitability position. The objective of research is to get a sense of how the profitability measures of retail companies will be impacted by the new lease standard. More specifically, the focus of research is on the profitability ratio that is earnings before interest and taxes which is the measure of operating return on assets. The reason for selecting the companies from retail sector is because it is expected that such firms will be significantly impacted as a consequence of large amount of leased assets in the form of store space (Lizieri 2018).

A sample of publicly traded companies having the highest amount of the lease obligations off balance sheet have been identified for determining the impact of new lease standard on the measures profitability. Ten companies having largest commitments relating to operating lease for the year ending 2014 has been selected. The warranty of new lease standard is to be considered which is depicted from the operating lease amount recorded at amount $ 34 billion that is off balance sheet. Sample of retailers have been identified and their profitability measures have been measured in terms of impact of new lease standard. It has been found from the analysis that there is direct relationship between the measures of profitability and operating lease size in relation to total assets of firms. A cursory test of operating lease amount significance in relation to total assets base of firm would enable the users of financial statement of the initial sense concerning the new lease rules impact (James 2016). Furthermore, the impact of new rule will also take into account substantial amount of operating income generated by company. It is likely that retailers would incur great decline if they outperform the industry in terms of return on invested capital and return on assets. Moreover, the assessment of performance of companies relative to their competitor’s performance will also be impacted by new rules ((Cornaggia et al. 2013). The result demonstrates the fact that there will be significant impact on profitability measures due to the application of new standard. Nevertheless, the operating lease amount relative to overall profitability and assets forms the basis of variation in the change due to the new standard.

Under the current rules of lease standard, challenge is faced by users in terms of valuation and interpretation of operating lease. The discount rates and lease terms is required to be estimated by users under the current rule that increases the chances of introducing potential errors in the analysis. Moreover, for the calculation of return on asset, there will not be any requirement of making assumption about operating lease. It would assist financial users in applying a consistent approach for conducting analysis of companies. Therefore, it can be inferred that there will be some consistency in treatment of lease liabilities and assets due to the introduction of new rules (Brouwer et al. 2015).

Explaining the purpose of article two by exploring research question:

The journal article has been extracted from journal of corporate finance that has the research objective of examining the implications of accounting treatment for performance metrics and common risks. Research intends to demonstrate the implications of pending change relating to lease accounting standard on performance and risk metrics and measuring the magnitude of potential leased capital that is brought onto the balance sheet. For comparing the firms across times, the accounting measures have been adjusted by regulators, analysts, investors and researchers (Fafatas and Fischer 2016).

The off balance sheet lease liabilities have been measured in terms of measuring the value of debt equivalent. It is demonstrated by the findings that the magnitude of capital lease has decreased while there has been increment in off balance sheet liabilities. However, it cannot be concluded that a shift to operating lease from capital lease is reflected merely by the magnitude of off balance sheet liabilities being massive to capital leases. An expansion in the financing of fixed cost over time is suggested because the magnitude of capita lease is less than the magnitude of lease financing that is done off balance sheet (Fafatas and Fischer 2016). Furthermore, it is also suggested that researchers should make estimate of value of debt equivalent when employing an accounting based risk or considering the structure of capital budgeting.

It has been found that both the ordinal ranking and cardinal measures of firms is altered by the leased assets capitalization. The anticipated changes brought by the changes in lease accounting standard is expected to bring a more consistent comparison across firms, however, the time series comparisons would be further complicated.

Evaluating the differences and similarities between the findings of two studies:

From the analysis of the two research articles, it can be seen they have similarity in terms of determining the impact of the new lease standard in different aspects. The first article has the research objective of determining the impact of new lease standard on the profitability measures of retail companies. On other hand, second article focuses on the impact of bringing leased assets onto the balance sheet in terms of performance and risk metrics. However, the main focus that is presented in the second article is on the off balance sheet leasing as the new standard will bring lease on balance sheet and thereby making it essential to determine the impact of such lease presentation on organization performance and stakeholder decisions. First article takes into account different financial ratios such as earnings before interest and tax by asset ratio, for assessing the impact of the application of the new lease standard while second article takes into account time in OBS leasing (Zeghal and Lahmar 2016).

Implication of research findings to external reporting stakeholders:

The accounting implications for the classification of leased assets under the new standard have been investigated. New lease standard will help in addressing the quality of ethical behavior and professional judgment and thereby assisting accountants in performing their stewardship responsibility faithfully. The redefined metrics and financial ratios will impacts the shareholders by influencing their investment decision making (Magli et al. 2018). It is so because there will be remarkable influence of ratios such as debt to asset ratios, debt to equity ratios and return on assets of reporting entities due to mandatory operating lease capitalization. Furthermore, the findings generated from the analysis of articles are relevant to standard setters and regulators as it provides them with insight into the way investment professionals should deal with the items of off balance sheet. In order to minimize the impact of accounting change, the existing controls and process should be re evaluated by the accountants. Stakeholders are made acquainted with the existence of opportunities for transitioning to new lease standard that would help them in saving on lease activities and driving improvement in organizations (Wong and Joshi 2015).

Conclusion:

From the analysis of the chosen articles concerning the implication of application of new rules on lease, it can be inferred that implementation of standard would help in benefitting the stakeholders primarily external investors. Nevertheless, the introduction of the new lease standard would help organization in bringing consistency in treating leased liabilities and leased assets on balance sheet. The difference would exist with respect to the effects of types of leases on the income and cash flow statements. New lease standard have wide ranging effects in terms of capital metrics to debt covenants, employee compensation, cost of compliance and system of information technology. Therefore, it has been found that there are wide range impacts of new lease standard of companies.

References list:

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