Introduction
The Financial Accounting Standard Board (FASB) is an independent board that incorporates different professionals who are mandated with the responsibility of communicating appropriate standards used for financial accounting and reporting purposes. The concept is referred to as the Accepted Accounting Principles (GAAP) and is often used by organizations in the preparation of financial reporting. Existing standards in FASB face a lot of criticizing for failing to meet the needs of users more effectively as far as financial reporting is considered. The reason why the facets are considered inappropriate and should be amended is that they are not a faithful representation of the financial standing of leasing transactions. Revenue is an important aspect that is often used by investors to assess organizational performance. However, the recognition guidance significantly differs with the use of GAAP and IFRS, an element that calls for improvement. The international body in charge of regulating the practices used in recognizing revenue, hence the need to introduce new guidelines to enhance the concept of financial reporting.
Thesis statement
FASB has a significant role in the management of actual reporting in the global business, and it is therefore mandated with a responsibility of improving financial accounting practices which are in use. Different stakeholders such as investors, managers and even the public need to use financial information for purposes of making informed decisions. The concept of FASB, therefore, offers people a chance to experience open and knowledgeable reporting, which is free of any bias whatsoever, as different stakeholders are involved in the process. The move would allow for more transparency with an aim to account for the difference in revenue recognition, financial tools used, and leases among other important aspects (Krasowski, 2015). The above study is justified to be carried out as it will have a significant impact on the improvement of the financial practices and the reporting of financial statements so as to come up with more reliable information to rely on for decision-making purposes.
What is the new rule proposed by FASB? When is the date? What are the latest updates?
According to the current statistics on FASB, it is evident that most of the leases fail to be reported on the financial reporting submitted each year. Furthermore, the existing accounting models for leases require a lot of amendments as they are not active in reporting, hence do not give people accurate information to make informed decisions. In the case of capital leases, the existing models account for lease assets and liabilities in the reporting but fail to recognize operating leases, an indication of a major shortcoming. However, the new changes will see to it that all the assets and liabilities of over 12 months are recognized in the reporting with precise information on their respective rights and obligations (Davis, 2013).
The new changes started to be effective after 15th December 2015, and public companies are requested to adjust accordingly lest they incur huge penalties for failing to adhere as required. However, for the case of the non-public organizations, the new changes will take effect on December 15th, 2019 with follow-up progress in the later years. However, companies are advised to adopt the practices early in all organizations as evidenced on the significance of the above concepts in improving on financial reporting in business organizations, an aspect that will support making informed decisions.
Why is the FASB doing this?
The changes are meant to offer more accuracy through lessors' exposure to the various jeopardizes as stipulated by FASB. The changes are essential as they will help in enhancing the eminence and ability to compare the financial reporting offered by different organizations for purposes of making informed decisions. The past approaches used by FASB experienced various shortcomings, a feature that made the process to be sidelined for not giving a real representation of financial reporting of organizations. Therefore, the amendments to the various financial tools will help organizational managers to come up more reliable information as far as financial reporting is concerned.
How is it different/ similar to the old rules?
The new features caught in the balance sheet include estimated liabilities and a focus on the intangible assets, indicating a right to use on a given property for a specified period of time. For the case of leases over 12 months, they will be captured as operational, a concept that was absent in the old system of rules. Different scholars are concerned that the old FASB rules omitted over 85% of leases, which were not reflected in the financial reporting (balance sheet), a feature that made it difficult for investors to make informed decisions.
Some of the fundamental changes to expect in the new model which are different from the old practices include the following; the new standards employ professional judgment and are more of contracting based on varied terms. The rules are applied in contracts between organization entities and consumers, and a single contract may involve some different performance obligations (Starczewski et al., 2013). The new standards have different rules for evaluating licenses, evaluation of contracts among other key changes.
How will the new rules impact the financial statements?
The introduction of the new feature will incorporate more disclosures, which will be further explained with the help of footnotes in the financial statements. Unlike in the old rules, the new rules take account of all FASB standards even for the small ticket leases like for the case of copiers and laptop used in an organization. The new guidelines will help eliminate any form of inconsistencies and weaknesses that existed in the old practices, and offer users a robust framework for solving various revenue issues. The new guidelines help organizations to compare easily revenue recognition practices based on entities, industries and in the general markets. As mentioned earlier, the disclosures will see to it that organizations are provided with more useful information for decision-making purposes (Starczewski et al., 2013). The improvement will further simplify the preparation of the financial statements as it will significantly reduce the requirement as compared to the past.
Which industries are impacted?
The changes in FASB will have a significant impact on the global business with definite influence on business in particular sectors such as shipping, airline industry, construction and mining industries. The proposed changes will have a significant impact on various businesses that involve themselves on leasing of equipment and real property such as the real estate ventures. This includes every business that participates in the rental (property, plant or equipment) within a given period of the year. The changes will come with a right to use model, a concept that will introduce new aspects to be captured in the balance sheet (McKee, 2015).
Who are the people affected (investors, accountants, auditors)? How?
FASB changes affect a broad range of people including investors of different projects, users, and auditors in diverse ways as will be explained shortly. Users of financial information are influenced by the change as they have a role as managers of their business to develop effective strategies to enhance growth, and create value and long-term or short-term objectives (Ward, 2016). Furthermore, the use of the concept in conducting a financial analysis of their business is to understand the trend in performance so as to make necessary adjustment as may be required. Auditors, on the other hand, will be influenced by the concept differently as they will be expected to decide on the approach to use in conducting their accounting practices, which will be in harmony with effective reporting.
Brief summary of current opinion
Previously, companies have experienced challenges in obtaining transparent financial reporting due to a lot of negligence in the development of financial statements. Some of the leases that were omitted in the development of balance sheet have a significance influence in decision-making, as far as management of the business is concerned. Moreover, different scholars are in agreement that wrong financial statements often contribute to faulty decision making, a feature that costs companies a lot of revenue and resources. Therefore, with the amendments in the financial reporting practices, users of financial information will be offered with a chance to use the transparent information to make an informed decision, which is crucial for success in the market.
Conclusion
It is worth concluding that companies ought to assess their existing systems and process so as to come up with practical changes that will help them comply with the new standards. This will include updating of their IT system so as to capture revenue effectively within the stipulated period, an aspect that calls for an understanding of the new rules. The new guidelines as evidenced from the study have a significant contribution in revenue recognition, an aspect that plays a great role in decision-making process.
References
Davis, B. F. (2013). Proposed New Lease Rules: What Now?. Financial Executive, 29(9), 11-12.
Krasowski, S. (2015). FASB modifies ALLL to support banks' ability to recognize losses: in a recent RMA audio conference, banking professionals discussed the implications of the proposed FASB changes--and assessed what these changes mean for institutions. The RMA Journal, (9). 38.
McKee, T. E. (2015). New FASB standard addresses revenue recognition considerations. Healthcare Financial Management, (12), 72.
Starczewski L., Ingersoll B., &Ronney 2003. Revenue Recognition: Ten Top Changes to Expect with the New Standard. Bllomerberg BNA. Retrieved on 4th April 2016 from http://www.bna.com/uploadedFiles/Content/Web_Forms/Real_Magnet_Form/FEI_Top_10_Changes/RevRec_TenTopChanges%20Complete.pdf
Ward, D. (2016). What Will The New Lease Standard Mean For Your Balance Sheet? Mondaq Business Briefing.
