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WORKSHEET

NAME OF STUDENT:
The Historical Development of the Concept of Lessee
TITLE:
Accounting in Financial Reporting
SOURCE/JOURNAL:

ABSTRACT:
Over the years, accounting standards in financial reporting have been governed, regulated and
influenced by two financial standard-setting bodies, namely the Financial Accounting Standards
Board (FASB) and the International Accounting Standards Board (IASB). Furthermore, these
bodies have issued numerous financial reporting standards. One such standard, that has been a
point of discussion since 1949, is that of lease accounting to achieve fair presentation,
transparency and relevant information for users of financial statements that are globally accepted
and consistently applied across the board. Lessee accounting in financial reporting is an important
aspect in lease accounting. The understanding of the concept of leases has resulted in different
interpretations, models and, ultimately, the accounting treatment from a lessee's perspective.

The aim of this study is to perform a qualitative narration and interpretation of the conceptual
basis and historical development of lessee accounting within the standard-setting bodies, the
FASB and IASB, in order to describe the evolution of lessee accounting. The research describes
the developments of lessee accounting from the late 1940s document Disclosure of Long-Term
Leases in Financial Statements of Lessees up until International Financial Reporting Standards
(IFRS) 16 Leases authored by the American Institute of Certified Public Accountants (AICPA)
and the IASB, respectively. The qualitative interpretation of this research is to chronologically
and systematically track the historical development of lessee accounting, and to document the
evolution in the conceptual thinking and the key driving factors that moved lessee accounting
from rules-based and capitalisation versus non- capitalisation towards the right-of-use thinking.

The study found that, for over half a century, lessee accounting has created a lack of
transparency, as well as inconsistencies and ambiguity regarding financial reporting. Before IFRS
16, standard-setting bodies struggled to find a solution to lessee accounting that effectively and
accurately depicts a lessee's economic and financial position without addressing off-balance-sheet
accounting and adopting a model that capitalises all leases. Ultimately, the promulgation and
issuance of IFRS 16, by eliminating the classification of leases between operating and finance
leases and capitalising all long-term leases and detailed disclosure requirements, symbolises a
move in the right direction for the financial reporting of lessees.

REFLECTION: Provide a brief and substantial answer to the following guide questions.

1. How valuable is this research in your field of specialization?

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To understand why the new lease accounting standards were introduced, it is essential to
understand the previous lease accounting standards. It is valuable in our field of
specialization since the main objective of this research is to narrate and interpret the
conceptual basis and historical development of lessee accounting to describe the evolution
of lessee accounting. It helps us chronologically and systematically track the historical
development of lessee accounting, document the evolution in conceptual thinking and the
key driving factors that moved lessee accounting from rules-based and capitalisation
versus non-capitalisation towards the right–of-use thinking.

2. What are your learning takeaways from the research?

Through this research we have learned that for the longest period of time, lessee
accounting lacked transparency and had inconsistencies and ambiguities regarding how it
is reported. We have also learned that before the IFRS 16 that we have now, IASB and
FASB struggled to find solutions for these problems.
The prior standard's inconsistent lease accounting procedures served as another impetus
for the revision. Even if an operational lease had a current obligation that was identical to
a finance or capital lease, no liability was recorded. No of the classification, the lessee's
responsibility to make the remaining lease payments remains the same; nevertheless, one
classification acknowledges a lease debt while the other does not. According to the new
lease accounting standard, this has altered.

Also, according to this research the constant amendments to the disclosure requirements
did not achieve the need to adequately measure and recognize the right of use and
obligation to pay for the right of use created by the lease on the face of the lessee’s
financial statements. This has enabled preparers of the lessee’s financial statements to
structure lease agreements in a way that achieves an accounting method that, either
intentionally or as an unintended consequence, avoids recognising or capitalizing the right
of use that the lessee enjoys.

Furthermore, we have learned that the changes made have resulted in a fundamental shift
in accounting for a lease and how a lease is reflected in a company's financial statements.
The new lease accounting standards were not introduced to address the deficiencies of
lessor accounting but lessee accounting.
REACTION: Among your teammates, whose research article appeals to you the most? Explain.

Analysis of the Effects of Applying the New IFRS16 Leases on the Financial Statements

The group whose article was about the analysis of the effects of applying the new IFRS16 leases
on the financial statements appeals to us the most because it is stated in the article why the IASB
issued a new accounting standard which is the IFRS 16 in order for us to have a better and
comprehensive presentation of accounting information related to accounting leases which can be
useful to accountants of today. The shift from IAS 17 to IFRS 16 implements a new accounting
model that would influence the coverage of information presented in the financial statements as
well as the financial ratios of a lessee. Through this research, a new standard and new accounting
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model for leases will provide investors and other financial statement users with more precise
information to assess a financial position and value the debt obligations of a company, as well as
to more accurately assess risk undertaken by companies. Extended coverage of accounting
information presented in lessees’ financial statements is useful for different users of financial
statements. Changes in lease accounting enables users of financial statement with the information
about the amount, timing and uncertainty of cash flows that arising from a lease.