The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are responsible for ensuring that all relevant and material financial information is properly codified in the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
The purpose of this assignment is to give students experience using the FASB Accounting Standards Codification (ASC) and the International Financial Reporting Standards (IFRS). These two sources are the most current accounting guidance for organizations required to use US GAAP and/or IFRS. Students will also check for any proposed or pending changes to the most current accounting guidance. Accounting for leases is used as an example as there was a major Accounting Standards Update (ASU) issued by the FASB and IASB in 2016 with at least one additional ASU and/or IFRS issued each subsequent year. Knowing how to access the most current and pending changes to US GAAP and IFRS is a skill employers and clients will expect of accountants.
Instructions
For this assignment, you will select a public for-profit corporation of your choice to write a 3–4 page (not counting the cover page, abstract or reference list) report in which you:
Summarize the GAAP versus IFRS existing and pending (if any) requirements for accounting for leases.
Reflect knowledge of both the principles and standards of each and include any relevant information that impacts accounting for leases.
Analyze the impact of GAAP and IFRS on the reporting of your chosen corporation’s leases.
Reflect knowledge of GAPP and IFRS and include information specific to your chosen corporation.
The next two tasks will ask you to analyze including lease liability and eliminating lease liability and the impact each has on the financial ratios of your chosen corporation.
Analyze the impact that including lease liability has on the financial ratios of your chosen corporation, report your conclusion.
Provide a detailed description and supporting calculations.
Provide conclusions based on the information gathered in the analysis.
Analyze the impact eliminating the lease liability has on the financial ratios of your chosen corporation by recalculating the debt-to-equity ratio, report your conclusions.
Provide a detailed description and supporting calculations.
Provide conclusions based on the information gathered in the analysis.
Full Answer Section
2. GAAP vs. IFRS for Leases:
2.1 Existing Requirements:
- GAAP (ASU 2016-02): Requires recognition of right-of-use assets and lease liabilities for all leases, except for short-term leases and low-value leases.
- IFRS 16: Mandates recognition of right-of-use assets and lease liabilities for all leases, with no exceptions.
2.2 Pending Changes:
- GAAP: Currently, no significant pending changes to ASU 2016-02 are identified.
- IFRS: None identified.
3. Impact on [Chosen Corporation]:
3.1 Lease Accounting:
- Analyze how [Chosen Corporation] currently accounts for its leases, specifying if it adopts US GAAP or IFRS.
- Discuss the impact of the adopted standard on the corporation's:
- Balance Sheet: Increased assets and liabilities due to recognized right-of-use assets and lease liabilities.
- Income Statement: Lower depreciation expense and higher interest expense.
- Financial Ratios: Potential changes in debt-to-equity ratio, leverage ratios, and profitability ratios.
3.2 Specific to [Chosen Corporation]:
- Gather financial statements and analyze relevant lease disclosures.
- Calculate key ratios for relevant periods before and after adoption of the new lease standard.
- Discuss the specific quantitative and qualitative impacts on the corporation's financial position and performance.
4. Analysis of Lease Liability Impact on Financial Ratios:
4.1 Including Lease Liability:
- Select relevant financial ratios (e.g., debt-to-equity, fixed-charge coverage ratio, interest coverage ratio).
- Recalculate the ratios for relevant periods, including the lease liability.
- Analyze the changes in each ratio and explain their implications for investors and creditors.
- Discuss the limitations of using ratios alone for financial analysis.
4.2 Eliminating Lease Liability (Hypothetical):
- Recalculate the chosen ratios assuming no lease liability recognition (hypothetical scenario).
- Compare the ratios with those obtained in section 4.1 and explain the differences.
- Discuss the limitations of this hypothetical scenario and its implications for understanding the corporation's true financial position.
5. Conclusion:
- Summarize the key findings regarding the impact of GAAP and IFRS on [Chosen Corporation]'s lease accounting and financial ratios.
- Highlight the importance of considering lease accounting standards when analyzing the corporation's financial health.
- Offer insights into the limitations of financial ratios and the need for further analysis beyond pure numerical comparisons.