Bristol Business School Academic Year: 09/10 Assessment Period: August Assessment Type: Referral Coursework Module Leader: Module Number: Module Name: Word Limit: Ufuk Misirlioglu (UWE), Angie Ng Hui Chun (Taylors) UMAC3N-20-3 Corporate Reporting Theory and Practice 2,000 Coursework Submission Date and Time: Assignments are to be submitted by 2pm Monday 16 August 2010 at the Programmes Office. Please be aware that there is NO 24hr or 10 day window this year. Deadline: Monday 16 August 2010 14:00 Assignment Instruction: A- ASSIGNMENT OBJECTIVES This assignment seeks to assess your ability to: Critically evaluate and discuss the new rules on leases issued by the IASB with reference to the key proposal for lessee accounting. Apply appropriate knowledge, analytical techniques and concepts to problems and issues arising from both familiar and unfamiliar situations; Think critically, examine problems and issues from a number of perspectives, challenge viewpoints, ideas and concepts and make well-reasoned judgements; Present, discuss and defend ideas, concepts and views effectively through formal language. B- BACKGROUND In March 2009, the International Accounting Standards Board published a discussion paper entitled, Leases: Preliminary Views (the DP) in relation to the ongoing joint project on leases with the FASB. The main objectives of the DP are to propose a new lease accounting standard to ensure that the assets and liabilities arising under lease contracts are recognised in the statement of financial position. Under the existing standard IAS 17 Leases, accounting for finance leases are treated in a different way to operating leases. If a lease is classified as a finance lease, assets and liabilities are recognised in the statement of financial position of the lessee as similar to purchase of an underlying asset. For an operating lease, rentals are accounted for as an expense in the lessee’s income statement. The Board believes that the existing accounting model or leases fails to meet the need of users of financial statements. For example, lessees do not reflect all liabilities on the statement of financial position. The existing standard results in many assets and liabilities being off-balance sheet even they fall into the board’s definitions of assets and liabilities (the right to use the leased asset and the obligation to pay rentals). In addition using two very different accounting models (the finance lease model and the operating lease model) reduces comparability and increases inconsistency for users. The board tentatively decided to adopt a new accounting model for leases. Under the proposed model, the lessee would record an asset representing its right to use the leased asset and a liability for its obligation to pay rentals. The proposed model eliminates the distinction between finance and operating leases and recognizes all leases on the statement of financial position. This is a fundamental change from current practice in accounting, as it eliminates operating leases for lessees. Operating leases would no longer be off-balance sheet. The asset (right to use) and the liability (obligation to pay) would be measured at the present value of the lease payments including a probability-weighted estimate of contingent rentals. In addition the expected lease payments would be discounted using the lessee’s incremental borrowing rate and assets are depreciated over the shorter of the lease term and the economic life of the lease asset. These main changes and other related issues proposed in the DP would have significant indications for gearing or leverage ratios and other financial ratios such as profit margin and return on assets. They also introduce significant judgment into measurement. Some have argued that the “risk and rewards” concept associated with ownership is more appropriate for recognition of an asset than the right-of-use approach proposed in the DP. For example, when there is no purchase option, the future economic benefits from the underlying asset do not flow to the lessee. There are also other debates on the DP such as the selection of discount rates, exclusion of short-term leases and recognition of contingent rentals that require a lessee to determine the most likely rentals by considering the range of possible outcomes. The Board plans to issue an exposure draft of a new lease accounting standard in the second quarter of 2010. The current project plan envisages that a final Standard will be issued in the second quarter of 2011. The DP published by the IASB and the comment letters on the questions set out in the DP are available from www.iasb.org. Required: You are required to write a report for the CEO of a public group company after reviewing the DP, relevant comments from interested parties1 and other related sources. Assume that your company acts as lessee for land and building, and some valuable plant and equipment and has both operating and finance leases. Your report should include a discussion of the following issues that will need to be addressed for the lessee. 1) Introduction of the DP: a. Briefly explain the new accounting model for lessees and discuss its significant aspects and issues indicated above. 2) Critical analysis of the DP: a. Critically analyze the effects of the changes resulting from the proposed model on your company’s financial statements. b. Critically analyze whether the new lessee accounting can meet the needs of users (investors, analysts and others that use financial statements of the company) in terms of the qualitative characteristics of financial statements, i.e. comparability, relevance, understandability and reliability. C- MARKING CRITERIA 1 See the entire Comment Letters on Discussion Paper on leases from www.iasb.org Marking Criteria Presentation: Clear, well-structured report, Maximum Marks 10 with appropriate headings and approved style referencing. (Word count exceeding 2,000 words) Introduction of the DP: Briefly explain the (Deduct 10 marks) 30 new accounting model for lessees and discuss its aspects and issues indicated above. Critical analysis of the DP: a) Critically analyze the effects of the 30 changes resulting from the proposed model on your company’s financial statements. b) Critically analyze whether the new 30 lessee accounting can meet the needs of users (investors, analysts and others that use financial statements of the company) in terms of the qualitative characteristics of financial statements, i.e. comparability, relevance, understandability and reliability. Total marks 100 D - GUIDELINES FOR COMPLETION AND SUBMISSION OF REPORT: 1. Please complete Bristol Business School ‘Assignment Front Sheet’. 2. The word limit is 2,000 words. You are not allowed to exceed the word limit under any circumstances. If you exceed the word limit 10 marks will be deducted from the total marks. 3. You should include a word count in the Assignment Front Sheet. 4. The Harvard system is used for the referencing style. Please see the library Webpage at http://iskillzone.uwe.ac.uk. 5. The pages of the report should be numbered sequentially (e.g. page 1 of 12, etc.). 6. The pages of the report should be secured as follows: stapled in the top left hand corner; or held together with a plastic binder; or together with a plastic wallet. 7. SUBMISSION DEADLINE: A hard copy of the completed assignment should be inserted into the appropriate assignment post box located near Cribs coffee shop in the Business School by 2.00 p.m. on Monday 16th August 2010. 8. NEW REGULATIONS: Please note the deadline for assignment submission is final. You will not be able to submit your work for marking or feedback after 2pm on the submission date. If you have extenuating circumstances for failure to submit, you must immediately consult a Student Adviser and complete the appropriate form for consideration. Non submissions without reasonable and accepted extenuating circumstances could affect your eligibility for referral attempts and thus the completion of your degree. If you believe you are entitled to additional time to complete assignments due to special conditions relating to disability, please see Debbie Sturge (Leader of Student Support and Guidance [email protected]) immediately to discuss whether these conditions apply to your case. Adjustments cannot be made at the last minute. These rules apply from September 2009 and override any previous arrangements. See guidance on academic regulation on the UWE and BBS websites for further information. E - ASSIGNMENTS: STATEMENT ON ASSESSMENT OFFENCES Plagiarism, collusion and non-compliance with assessment regulations are offences under University regulations and where suspected, will be investigated under official procedures. Penalties vary depending on the severity of the offence but can include expulsion from the University. Appropriate citation of source documents is essential when presenting written work and it is crucial that you quote the books, journals, websites etc. that you used whilst researching your work. Information about referencing is available from the Faculty Librarian or the library WebPages at: www.uwe.ac.uk//library/resources/general/info_study_skills/refs.htm For further information, please see BBS Assessment Offence Guidelines for Students. F- RESOURCES: 1. Main sources Discussion Paper, DP/2009/1, Leases Preliminary Views, www.iasb.org Comment Letters on Leases Preliminary Views, www.iasb.org Further information accessible from www.iasb.org 2. Useful websites ACCA website: www.accaglobal.com ASB website: www.asb.org.uk CIMA website: www.cimaglobal.com FASB website: www.fasb.org IASB website: www.iasb.org IAS knowledge: www.iasknowledge.com IAS Plus: www.iasplus.com ICAEW website: www.icaew.co.uk UWE Library Services: http://www.uwe.ac.uk/library/ Also, visit websites of professional accountancy firms.