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In February 2016, the International Accounting Standards Board (IASB) issued its most expected reporting standard on leasing contract. Under its basic concept, a lessee will recognize right-of-use (“ROU”) assets and related lease liabilities on the balance sheet for all leases, except for short-term leases (12 months or less) for which the recognition exemption is elected. The most significant change will be on the balance sheet for lessees. The pattern of expense recognition in the income statement will depend on a lease’s classification.
As of today, there are two types of accounting methods for lessees as stated in MFRS 117 Lease Accounting, depending on the type of lease: finance leases and operating leases. While the former is recorded on the balance sheet because the lease transfers substantially all of the benefits and risks incident to the ownership of property to the lessee, the later stays off the balance sheet and payments by the lessee to the lessor are considered operational expenses. Operating leases are often disclosed only in financial statements. A vast majority of leases today, such as building leases, are operating leases.
Meanwhile, starting from the financial year commence from January 2019, the above two lease classifications for lessees will still exist, but the changes in lessee accounting for finance and operating leases based on new standard MFRS16 are summarised as follows:
Recognize ROU asset and lease liability at the commencement date of the lease. The lease liability, initially and subsequently, is measured at the present value of the unpaid lease payments. The ROU asset initially is measured at the amount of the lease liability initially recognized, plus initial direct costs and prepaid lease payments, less lease incentives received. The ROU asset is subsequently amortized generally on a straight-line basis.
Recognize ROU asset and lease liability at the commencement date of the lease. The initial and subsequent measurement of the lease liability, and the initial measurement of the ROU asset, are the same as for finance leases. The ROU asset is subsequently amortized in such a way so that the lease cost is recognized on a straight-line basis over the lease term in the income statement (which results in an increase in the periodic amortization of the ROU asset over the lease term).
Recognize interest on the lease liability separately from amortization of the ROU asset
Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis.
Cash Flows Statement
Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities.
Classify all cash payments for leases within operating activities.
How can SALIHIN be of help?
- We bring the knowledge and experience gained from working on the financial reporting services to help client navigate the bottlenecks of transiting from MFRS117 to MFRS16.
- We advise on appropriateness of accounting policy based on MFRS 16; and
- Our professionals provide advice on the reclassification and measurement of existing lease contract.
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Certified Islamic Professional Accountant (CIPA) is one of the two flagship qualifications which are offered by the AAOIFI. It is the only internationally recognized qualification in accounting for Islamic financial institutions, catering to all banking, investments, and Takaful segments. The CIPA program is intended towards development of, and enhancing of, industry’s human resource capabilities by developing experts for Islamic finance accounting and financial reporting, audits, and Shari’ah audits.
|Language||English and Arabic|
|Average Study Duration||1+ years|
|Certification||Examination - Practical Experience Requirement (PER) Report|
|Practical Experience||Yes (1 year unless exempted)|