In: Accounting
PART A (MAX 500 words in total)
Effective 2019, the new accounting standard on leasing, AASB16 Leases, will replace the existing leases standard, AASB117. It will remove the classification of leases that has been used for decades and which divides leases into operating and financial leases from the perspective of lessees. The new standard requires leases that were formerly known as operating leases (and were kept off balance sheet) to be recognised for balance sheet proposes (both an asset and a liability will be recognised).
Required:
Evaluate how total assets, total liability and equity would be affected by the new accounting standard on leasing from the perspective of lessees. (5 marks)
The changed standard means that leases with a short-term (e.g., several months) will appear on a balance sheet of lessees, as will leases with a long-term (e.g., multiple years). Discuss whether this new approach is consistent or inconsistent with the definitions of assets and liabilities included within the IASB Conceptual Framework. (5 marks)
PART B (MAX 500 words in total)
Microsoft historically followed the practice of recognizing 25% of revenue from its Windows software over three or four years as it promises future upgrades and add-ons. With the launch of Vista in 2008, it changed the policy to record most of the revenue in the period in which the software was sold. In the third quarter for fiscal year 2008, Microsoft reported an increase in earnings of 65%. The increase came from sales of the new Vista program and also from the acceleration in revenue recognition.
Required:
Critically evaluate the revenue recognition policy adopted by Microsoft in accordance with AASB15 Revenue from Contracts with Customers. (5 marks)
Explain the decision of management to change the revenue recognition policy in terms of the debt hypothesis of Positive Accounting Theory. (5 marks)
Part A
Effect of AASB16 Leases on total assets, total liability and equit:
Leasing is gaining prominance to access services of assets as against traditional approach of out right ownership. This is because, with leasing the entities can avail the services of assets while avoiding the risks involved with ownership. However, AASB117 adopting the traditional accounting approach and was not recognising the operating leases in the books of the Lessees. However, the new standard, AASB16 on leases adopts the IFRS 16 - Leases, and recognises Lease Assets as "Right-of-Use" asset and Lease Liabilities. This approach will result in a more faithful representation of a lessee’s assets and liabilities and, together with enhanced disclosures, will provide greater transparency of a lessee’s financial leverage and capital employed.
The resulting gap between the "Right-of-Use" Asset and Lease liability will be added to the equity.
Short-term Leases:
"A Lessee may elect not to apply the requirements in paragraphs 22–49 to: (a) short-term leases; and (b) leases for which the underlying asset is of low value (as described in paragraphs B3–B8)."
According to the above citation from AASB16, the expemtion provided is optional and the Lessee can decide to apply this exemption or apply the regular provision of this standard in each case. Hence, the new approach is still in consistant with the standard.
Part B
Effect of AASB16 Leases on total assets, total liability and equit:
Relevant extract fromAASB15: "An entity shall recognise the consideration received from a customer as a liability until entity’s obligation to either transfer goods or services in the future is complete or until the refund the consideration received". According to the above extract from AASB15, Micorsoft was wrong in recoginsing the full consideration received in the initial year while it has received a part of the consideration towards futur obligation of updates and add-ons for the next 3 year.