Leasing is vital to ABC, a public Ltd. as means of funding the business. The management is of the view that it’s necessary that they supply users of financial statements with an entire and comprehensible image of the entity’s leasing activities. They believe that this accounting model is incorrect and doesn’t meet the requirements of the standards and users of financial statements.
The company has leased plant for a set term of six years and the life of the plant is twelve years. The lease is non-cancellable, and there are no rights to increase the lease term or purchase the machine at the end of the term. There are no guarantees of its price at that time. The owner will not have access to the plant till the termination of the contract or unless permission is granted by ABC.
Fixed lease payments are due annually over the lease term after delivery of the plant that is maintained by ABC. ABC accounts for the lease as operating lease however the directors are unsure on whether or not the accounting treatment of an operating lease is conceptually correct.
Required:Discuss the reasons why the current lease accounting standards may fail to meet theneeds of users and could be said to be conceptually flawed
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