Australasian Accounting Business A Finance -Myassignmenthelp.Com

Question: Discuss About The Australasian Accounting Business A Finance? Answer: Introduction: The report is prepared to gain knowledge regarding the given case study by answering several questions attached with the same. Two cases are financial accounting in the real world 3.3 and 3.5 as provided. Financial accounting case 3.3 is about RBA right to doubt Lehman brother accounts and financial accounting case 3.5 is about retailers facing multibillion dollar hit from proposed lease accounting changes. Explanation of these two cases has been done by answering the questions related to each individual case. Retailers facing multibillion dollar hit from proposed lease accounting changes: Existing lease standard does not mandate reporting entities to disclose their operating lease on their statement of financial position rather than they are obliged to show financing lease. Financing leases appears on balance sheet while operating leases are not. Operating lease could be compared to regular rent agreements and finance leases are compared to debt purchase finance. Therefore, financing lease leads to leads to revealing of actual amount of debt that companies are owing to and this might hamper the financial reputation of investors from investors viewpoint. Opting for treating lease as operating lease does not lead to reveal actual amount of debts and therefore, it is preferred by company to treat lease as operating lease rather than financing lease (Arrozio et al., 2016). The new lease standard will have an impact on increasing the debt structures and balance sheet of companies as the focus is on operating lease capitalization. This increase in the balance sheet could suddenly violate the existing debt covenants. It depicts that for excluding the lease agreements, companies need to renegotiate exist debt covenants. Increased debt structure of companies covenants has the possibility of endangering violating debt covenants. This is so because such increased structure will have considerable impact on calculations financial covenants in arranging lease and other financial transactions. Shifting of operating lease into the debt structures will increase the amount of debt of borrowers (Wong Joshi, 2015). The credit arrangement would have ripple impact due to the implementation of this new lease standard. A debt covenant that relies on floated GAAP will have its calculation based on accounting rules in placing each time when the computation of covenant is done. On other hand, the calculation of debt covenants based on fixed GAAP is done on accounting rules using the debt covenants in place when it was negotiated originally. Borrowers relying on fixed GAAP will face lower risks and this is because when there is any change in accounting standard, then borrowers will not be exposed to debt covenants violation. Borrowings that are issued at the fixed rate do not expose the consolidated entry to interest rate risk that is valued fairly. On other hand, borrowings that are issues based on floating GAAP exposes the entity to fair value interest rate risks. Therefore, the differences between the debt covenants are likely to be attributable in terms of accounting treatment and the risks to borrowers. Debt covenants under fixed GAAP are not exposed to market risks and while that of floating GAAP are exposed to market risks (Beckman, 2016). Organizations, which are more likely to be lobby against the new accounting standard, can be explained by the determinants of lobbying in the field of setting accounting standards. As per the perception of managers, the possible impact of act on financial performance of organization will determine the lobbying decision. Organizations that are capital intensive and are required to make disclosure of huge volume of loans on their balance sheet are likely to lobby against the new lease accounting standard (Warren, 2016). Such organizations mostly treat lease as finance lease and make the disclosure of the same in the balance sheet as against companies treating lease as operating lease. RBA right to doubt Lehman brother accounts: Window dressing is the actions that are taken or are not taken prior to the issuance of financial statements for improving the appearance of financial statements. It is usually done by the management of company for improving the approaches of financing statements and this can take the form of removing the actual amount of value of debts that is owned by company, total manipulation of balance sheets. Window dressing can be performed any organizations who wants to look attractive in the investors eyes but in reality they are not (Edeigba Amenkhienan, 2017). Such practice can be exercised in all types of accounts such as accounts receivables, debt account, cash, revenue and expenses. Therefore, window dressing is the manipulation of the items of financial statements with an intention of concealing some usual transactions. This particular article is about the collapse of Lehman brothers that has manipulated its balance sheet with an intention of concealing huge amount of debts in the capital structure. Window dressing that has been done by Lehman brothers is concealing a debt of millions of dollars before its collapsing. Cause that was responsible for the collapse was practice of window dressing such as insisting on collateral for loans and unsecured mortgages. Accounting practice of organization was misleading and it is regarded as unethical on part of investors and organization as a whole. Before the collapse of bank, this particular financial institution has removed $ 50 million from the books of accounts. There was actionable manipulation of balance sheet and made non-culpable judgment errors in business. Moreover, Lehman brothers also made use of Repo 105 that was questionable by Reserve bank of Australia. The transactions related to Repo 105 and using this moved billion of Lehman accounts that ca me under scrutiny by banks. Accounting practice of Repo 105 led to moving of $ 39 billion of debt off balance sheet in 2007 in its final quarter and $ 49 billion in year 2008 in the first quarter and another amount of $ 50 billion in the second quarter (Grenier et al., 2015). Positive accounting theory is about the predictions of selection of accounting practices by organization by responding to any changes in accounting standard. It is the theory that helps in providing views with the descriptive information about the accountants behaviors. This particular theory is base done there three hypothesis and this involves bonus plan hypothesis, debt equity hypothesis and political cost hypothesis (Murphy, 2016). The case of Lehman brothers can be explained in the context of second hypothesis of positive accounting theory. It is illustrative of the fact that the more a company is in debt and the more it will be focusing on its present earnings due to presence of debt covenants. This particular perspective of the theory suggests it, that goal earning manipulation objective of organization should be consistent with the financial markets expectations. Manipulations of profit are done in the form of falsification and earnings management. Falsification is related to disclosing of wrong data to the users of financial statements and such actions are regarded as criminal activity (Backof et al., 2016). On other hand, earning management involves period postponement that influences the operations by changing method of measurements. The focus of this theory is the manipulation of profits done by the top-level management. In the case of Lehman brothers, it can be seen that organization was involved in both the perspectives of equity debt hypothesis according to positive accounting theory. Earning management was done in context of changing accounting practice that came under the scrutiny. It was mainly related to involve in is the use of repurchased agreements known as Repo 105 at Lehman brothers and this particular accounting practice has led to moving of billions of Lehman accounts. The main intention to use this particular accounting practice was to reduce or minimize the level of debt of organization and was used extensively before the crash. Furthermore, it was also engaged in falsification as it presented false figures in the balance sheet and duped investors. All such manipulation relating to understatement of debt in the statement of financial position was to be in line with the expectations of the financi al markets and their capability of influencing capital market. Faithful representation is one of the qualitative characteristics of conceptual framework of IASB that had been breached by Lehman brothers. The three economic phenomena that are embedded in the financial information that are represented faithfully involve neutrality, free from errors and completeness. The transactions of bank was not represented faithfully as it manipulated elements of balance sheets and reducing the level of debt and duped investors. Lehman brothers had breached their fiduciary duties and had presented a misleading picture of their financial position. Another qualitative characteristic that had been breached by organization is relevance that is operationalized in terms of confirmatory and predictive value. Such values are regarded as important indicators for value relevance in terms of decision usefulness of users. Lehman brothers had disclosed irrelevant figures on their balance sheet by moving the amount of debts off their balance sheet in every quarter of year 2007 and 2008. Therefore, it had breached characteristic of relevance. There is a high probability that companies with higher level of debts are more likely to engage in the practice of window dressing their financial statements. High level of debts in the capital structure of company is indicative of the fact that there is high proportion of debt in their capital structure and they are relying on borrowings for managing their finances. This depicts that organization might face liquidity problem and considerably affects their credit worthiness. Presence of high level of debts comes is indicative of the fact that enough cash has not been generated to clear their previous long-standing debts and the company is not liquid (Warren, 2016). There should be appropriate proportion of debt in comparison to the equity capital. Therefore, high level of debt increases the chance of practice of window dressing by companies. Furthermore, the higher the level of corporate net debt to total equity increases greater chance of their exposure to sudden changes in the valu e of liabilities and assets. Hence, presence of high debt level also increases the chances of posing internal risks in terms of their overall liabilities and assets. It can be concluded that organization having higher debt level have the higher possibility of engaging in the window dressing practices (Edeigba Amenkhienan, 2017). Nevertheless, such window dressing practices are often misleading, dupe investors, and are regarded as unethical. Conclusion: The two case study provided depicts that the new lease standard comes with some controversies and the practice of window dressing is more inclined towards high debt companies. It can be inferred from the analysis of case study 3.5 that new lease standard comes with challenges and some of the operations are expected to lobby against the new standard. Case of Lehman brothers depicts that high-level debt firms often engage in window dressing practices. Nonetheless, the practice of window dressing has overall negative impact in terms of reputation of organizations, as such practice is considered unethical. References Arrozio, M. M., Gonzales, A., da Silva, F. L. (2016). Changes in the financial ratios of the wholesale and retail sector companies arising from the new accounting of the operating lease.Revista Eniac Pesquisa,5(2), 139-159. Backof, A. G., Bamber, E. M., Carpenter, T. D. (2016). Do auditor judgment frameworks help in constraining aggressive reporting? 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