Discuss the Concerns Raised by Users Regarding Argumentative Essay Example

a principled manner. Consequently, the standards rely on both subjective judgments and 'bright-line' tests, which can be difficult to apply. The primary issue is the significant and growing disparity between the accounting model for leases and other contractual arrangements. The classification of a lease as either finance/capital or operating has important ramifications on related topics such as capitalization of finance/capital leases and disclosure of operating leases by lessees. Without a clear distinction between these lease types, it is unlikely that the lessee would be required to capitalize the lease. As a result, there is inconsistent accounting for leases that meet the definition and similar arrangements that do not.

According to AASB 117, the operating lease structure is considered off-balance sheet accounting. This means that the lease obligation does not need to be reported as a liability on the balance sheet. However, critics argue that this classification is often desired and leads to leases being structured in a way that narrowly avoids being classified as capital leases. This is seen as a form of off-balance-sheet financing, which can be difficult for users to comprehend.

Additionally, the adjustments made for operating leases are inconsistent and often underestimate the actual lease obligations. The current lease classification rules lack transparency and lead to companies rearranging their leases to avoid complying with these regulations. This poses significant challenges for users when trying to evaluate a company's true financial position and risk.

Furthermore, the impact of these arrangements may affect debt-equity ratios calculated without considering the off-balance-sheet financing. Companies disclose this information only in footnotes, making it easy for financial analysts to make incorrect decisions based on incomplete information.

Therefore, the information provided in the

notes to the financial statement is inadequate for users to make reliable adjustments to the recognized amounts. However, it should be noted that not all companies intentionally use operating leases to avoid balance-sheet capitalization and its negative impacts on financial ratios. Operating leases have various economic benefits, including providing companies with access to capital that may not be available through other means.

Conclusion

After considering different views and arguments, it is concluded that the theoretical foundations of lease accounting issues are not in agreement and the debate is expected to continue. These findings indicate that the FASB should review the current rules-based approach to leases and adopt a more principles-based approach that requires lessees to capitalize their significant noncancelable leases. This approach would ensure that the accounting treatment reflects the economic substance of the transaction rather than being driven by its structure.

Users have the ability to make more insightful comparisons between companies that employ various leasing contracts and gain a more accurate understanding of the risks associated with companies that strategically structure leases to avoid lease capitalization.