Executive Summary
Leasing has become a common practice in investments since it is the easiest and best option of getting money or Assets for production. This discussion examines the appropriateness of the 2010 August Accounting for Leasing Draft that has aroused controversies across the globe. The paper explores various assertions expressed by financial analysts and other scholars in related professions. The assertions are discussed based on their application to oppose or propose the draft that seems to rub investors in the wrong way.
The expected changes include contracts subjected to leasing, lease related property, recognition of expenses involved and non interest rental contracts. It also presents the justifications that motivate each side to convince their opponents to drop their quests. In addition, it also presents various recommendations that will ensure the proposed draft is amended to accommodate all interest groups and ensure that all opinions are considered in drafting the final document.
Introduction
Business accounts are the most complex transactions investors must scrutinise to evaluate the performance of their businesses. The international Accounting Standards Board (IASB) and the Financial Accounting Standards Board are responsible for regulating the policies governing accounting for leases. This essay examines the impacts of the recent proposed accounting standards for leases.
Definition
A business account is the information represented in a diagram form to show various activities that take place in a business and which involve money. The most common accounts are trading, profit and loss, balance sheet and income statements. A standard is a requirement or regulation that ensures stakeholders have equal opportunities of participating in any activity. It also guides their interactions by stipulating codes of conduct and terms of service (Madura 2011). A lease is a contract that states the relationship between the owner and user of an asset in terms of payments to be made to the former. This means that an accounting lease is a regulation that requires the lessee to pay the lessor for using an asset at his disposal.
The Accounting Lease Proposal
The Financial Accounting Standards and International Accounting Standards Boards are facing criticisms for proposing further amendments to the already overburdening accounting lease regulations. The July 2011 proposal that all investments should provide their financial supporters all documents and information regarding their performance, lease and financial positions to ensure the lenders understand their clients very well. This issue has aroused arguments whether the proposal is justified given the present situation of financial complications caused by multiplicity of business accounts.
Inherent Assumptions
Even though, these two boards have explained various reasons to support their actions most investors and financial analysts continue to oppose this move and claim that it will lead to unnecessary complications in businesses. The proposal is being rejected due to its ambiguous assumptions that make it unsuitable for regulating leases amongst stakeholders.
First, it assumes that investors fail to disclose their financial details as required by law when applying for loans from financial institutions. This means that they hide vital information that is relevant in determining their abilities to repay loans. Secondly, states collect revenues from taxes imposed on various investments and thus they cannot do this effectively if they are not able to estimate the value of an investment (Clubb 2011). Investors present false information to property valuers and this means that they evade paying taxes as the law stipulates. This becomes a serious challenge to the implementation of various local authority programmes aimed at promoting the welfare of investors and their property.
Most investors underestimate their liabilities and this becomes a serious concern to lending institutions since their money is not guaranteed. Security of assets is very important in every business; therefore, this proposal will ensure the operating capital of banks and other financial investments are safeguarded.
On the other hand, some critics like Tom Pockett assume that businesses are already overburdened by the presence of many financial statements and thus this proposal should not be implemented (Edwards 2010). He assumes that the presence of income statements, balance sheets, trading and profit and loss accounts are adequate to provide the lesser the information required. In addition, other critics assume that these accounts already represent and contain the information that is supposed to be provided by the proposed accounting lease (Madura 2011). Moreover, they assume that this proposal will not be useful to people who lack university degrees since it is complicated and time wasting.
Lastly, they assume that most companies will breach their loan agreements should this proposal be implemented. This means that the information they provided earlier may be declared useless and thus they may be required to provide new information regarding their financial positions in terms of sales, profits, losses and abilities to repay their debts.
Justifications
These boards have sat several times to deliberate on this issue and it seems that they have not reached at consensus. This means that members have not unanimously agreed whether to implement or scrap the proposal of disclosure and this decision was expected to be resolved through secret ballot. Therefore, the future of this proposal hangs in the balance since it will be determined by the side that will get majority votes. This is a strong justification that points at the negative side of the proposal.
Therefore, investors and financial analysts claim that the difficulty in agreeing to what should be done regarding the proposal is influenced by the presence of different opinions expressed by members of these boards. This shows that those who prepared this proposal did not consult adequately before presenting it to different stakeholders.
Secondly, Pockett and other critics claim that the information required in this proposal is already provided in other documents. Financial institutions have always been asking for this information before advancing loans to businesses (Johnston 2009). In addition, they have been visiting and examining the abilities of these businesses to repay loans before they give them cheques. Therefore, there is no need of establishing another verification procedure since this will create delays and unnecessary inconvenience in the process of acquiring loans.
Lastly, loan defaulters cannot be stopped from doing this since some of them experience inevitable challenges that make them unable to pay loans. For instance, some insurance firms take a lot of time before compensating their clients yet banks cannot understand this situation. Financial crisis like the one witnessed in 2008 are some of the inevitable circumstances that force businesses to collapse and these force banks to have bad debts.
Opinion
The sentiments presented cannot be fully accepted or rejected due to some reasons that justify each side. First, it is important to explain that financial institutions are facing serious problems due to bad debts. They are spending a lot of money in trying to develop strategies that will ensure they do not experience financial crisis due to bad debts.
They continue to train loan officers regarding evaluating the performance of a business and assessing whether they can pay their loans or not. However, this exercise seems to bear no fruits since investors are taking advantage of their unscrupulous skills to provide false financial statements. It is important to explain that banks cannot stop lending money to investors since they recover it through high interest rates fixed on loans. These rates lock out many potential investors who wish to get loans to expand their businesses. Therefore, this proposal will play a significant role in ensuring that investors disclose their financial positions to banks before being given loans.
Secondly, the sentiments presented ignore the fact that all businesses cannot be equal even if they engage in similar operations. Investors have different skills and ways of promoting their businesses and using their profits. A company can plough back its profits and expand its operations while another one can use the same for personal and business issues. This means that they will not have equal abilities to service their loans. Therefore, they must provide accurate information to banks to ensure they are given loans according to their repayment abilities.
On the other hand, this proposal is just a waste of time and resources and thus it should not be implemented. There are other efficient ways of ensuring that investors are transparent and provide accurate information to banks. Lenders have usually faced a lot of challenges in establishing the truth about financial positions of various businesses. Traders have bribed property assessors to inflate or deflate their financial statements to reflect the desired qualities. This means that the problem does not originate form investors only but also from bank officials and other state officers.
In addition, it is impossible to predict financial situations and this should be a warning to lenders. Lending is a risky activity that should be secured by all means. This means that a person or institution that wishes to invest in money lending should be ready to take huge risks that may even threaten the existence of their operations. Critics claim that business activities are not for the faint hearted and thus every investor should be prepared for anything that happens during their operations. It is necessary to explain that instead of implementing this proposal money lending institutions should increase the interest rates imposed on loans and develop effective loan recovery processes.
The theory of Contractual Provisions in Leasing advanced by Thomas Chemmanur explains that it is only through leasing that the lessee can know the burden of servicing an asset and thus the individual will be committed to pay the loan or rent advanced by the lender.
Recommendations
The AASB exposure draft lease is a good document that attempts to regulate requirements involved in leasing. Even though, the main aim of this draft is to increase exposure of financial documents it has separated the public from the private information that may be exposed. However, it should consider drawing clear lines between information meant for public awareness and one for scrutiny to know the financial positions of a company.
In addition, the draft should specify the extent to which such information should be made available to third parties since not all of it ought to be exposed. Businesses are just like individuals that have personal secrets that should never be shared. This information is usually very sensitive and once it leaks out it may risk the operations of a business. This information can be used by competitors to spread propaganda or manipulate consumers against a rival investor. Therefore, the draft should explain how the proposal aims at protecting confidential information from being accessed by unauthorised parties.
Conclusion
The proposed draft should focus on instilling discipline amongst investors, lenders and other stakeholders involved in leasing. This means that it should not focus a lot of attention on implementing the proposal and fail to realise the need to promote ethical leasing standards amongst stakeholders. It will be cheaper educating investors on the need to disclose their financial statements than putting measures to arm twist them to follow regulations regarding exposure of this information.
References
Clubb, C 2011, The Roles of Accounting in Organizations and Society, Accounting, Organizations and Society Journal, vol. 5. No. 1, pp. 5-27.
Edwards, M 2010, Accounting for Lease, Journal of Accounting and Economics Journal, vol. 4. No. 3, pp. 23.
Johnston, P 2009, Debate on the Proposed Exposure Draft, Contemporary Accounting Research Journal, vol. 6. No. 2, pp.12-13.
Madura, M 2011, International Financial Management, Journal of Management Accounting Research, vol. 2. No. 6, pp. 15-17.
Martins, E 2011, Accounting for Leasing Exposure Debate, Accounting Auditing and Accountability Journal, vol. 3. No. 2, pp. 5-9.