...OFF-BALANCE SHEET FINANCING 1 Leases: Off-Balance Sheet Financing and the Strive for Transparency Today Brian Edman A Senior Thesis submitted in partial fulfillment of the requirements for graduation in the Honors Program Liberty University Spring 2011 OFF-BALANCE SHEET FINANCING Acceptance of Senior Honors Thesis This Senior Honors Thesis is accepted in partial fulfillment of the requirements for graduation from the Honors Program of Liberty University. 2 ______________________________ Gene R. Sullivan, Ph.D. Thesis Chair ______________________________ James B. Shelton, Ph.D. Committee Member ______________________________ Stephen R. Bowers, Ph.D. Committee Member ______________________________ James Nutter, D.A. Honors Director ______________________________ Date OFF-BALANCE SHEET FINANCING Abstract In today’s world, leases appear far and wide; they are commonplace throughout the business and accounting frontiers. Accounting for leases, however, is not so clear cut. Since there are various ways to account for leases, many companies pick and choose which they feel best suits their situation, even when this sweeps dirt under the rug along 3 the way. The financial procedures for dealing with leases should entail benefits as well as limitations to ensure each company is fairly representing all of its financial information. Off-balance sheet financing is one of the hot topics in accounting for leases because of the implications it imposes...
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...commencing 14 March 2011 IASB Agenda reference FASB Agenda reference 5D Staff Paper Contact(s) FASB ED Session March 9, 2011 Michael Gonzales Danielle Zeyher David Humphreys mgonzales@fasb.org dtzeyher@fasb.org dhumphreys@ifrs.org 143 +1 203 956 3478 +1 203 956 5265 +44 20 7246 6916 Project Topic Leases Accounting for Purchase Options Objective 1. The purpose of this paper is to discuss the accounting by lessees and lessors for purchase options included in a lease contract. 2. This paper analyzes the accounting for all purchase options, including both options that the lessee has a significant economic incentive to exercise (which would usually include bargain purchase options) and options that the lessee does not have a significant economic incentive to exercise (which would usually include non-bargain purchase options). 3. This paper is structured as follows: (a) (b) (c) (d) (e) (f) Summary of staff recommendations Summary of the proposals in the leases Exposure Draft Summary of feedback (including comment letters and other outreach) Staff Analysis Staff recommendations Appendix A – preliminary draft wording relating to the accounting for purchase options This paper has been prepared by the technical staff of the IFRS Foundation and the FASB for discussion at a public meeting of the FASB or the IASB. The views expressed in this paper are those of the staff preparing the paper. They do not purport to represent the views of any individual members of...
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...“The Bear Minimum” Case 08-4 Blakely Broom Connor Greco Spencer Craft Big Bear Power, a widely held public utility company, has agreed to a 10-year non-cancelable lease of a combustion turbine from Goliath Co. The lease was signed on December 15, 2010, and begins on January 1, 2011. The lease requires Big Bear to pay $1 million of legal fees incurred by Goliath, and third party legal fees as part of the lease. The lease also states that if a change in control event occurs, Big Bear must purchase the equipment leased from Goliath Co. within 30 days at a price equal to the remaining lease payments. This provision also indicates that a change in control also requires Big Bear to pay a penalty of $500,000. The last provision describes the rental payments, which are directly related to CPI. One of the first issues involved in calculating the present value of the minimal lease payments is figuring out what type of lease this is. This includes figuring out what the present value of the minimum rental payments are, the guaranteed residual value after the lease term ends, penalty for failure to renew or extend, and bargain purchase options, if any. Once we figure this we add the executory costs included in the payments to the minimal lease payments and calculate the present value by using the discount rate. Since this is a non-cancelable lease and it passes the final criterion mentioned in section 840-10-25-1, in that the minimum lease payments exceeds 90% the fair value...
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...Introduction A lease is a contractual arrangement that involves the coming together of two patties for the hire of an asset. The party that owns the asset is called the lessor. The other party in this agreement is the Lessee. The Lessee is the party which hires the asset which is leased. The asset is hired for a specified period of time. During this period, the Lessee makes rental payment to the lessor. After the lease period is over, the asset can be returned to the lessor. However, the asset can also be owned by the Lessee. The nature of ownership of the asset after the lease period is over depends on the initial details of the contract (Young, 2008). During the period of the lease, the Lessee takes care of the asset. The Lessee maintains the asset and is responsible for any damage on the asset. In order to record the leased asset, various entries must be made in the books of the Lessee. The different accounting treatments arise at this point. The accounting treatments are dependent on the nature of the lease. Section A: The three treatments There are three accounting treatments that the Lessee can apply in recording the accounting details for the lease agreement. In the first scenario, the Lessee takes acknowledgement of the fact that the lease is a liability to the business. It is a liability in the sense that payments have to be made for it to be used. The asset has to be returned back to the owner after the end of the lease period. Therefore, the asset is hired for a...
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...Canadian Center of Science and Education A Proposed Model for Accounting Treatment of Ijarah Muhannad A. Atmeh1 & Jamal Abu Serdaneh2 1 TAG Graduate School of Business Administration, German Jordanian University, Amman, Jordan 2 Faculty of Business Studies, Arab Open University – Jordan Branch, Amman, Jordan Correspondence: Muhannad A. Atmeh, TAG Graduate School of Business Administration, Mecca Street, P.O. Box 921951, Amman 11192, Jordan. Tel: 962-7-950-1220. E-mail: muhannad.atmeh@gju.edu.jo Received: May 22, 2012 doi:10.5539/ijbm.v7n18p49 Accepted: June 20, 2012 Online Published: September 16, 2012 URL: http://dx.doi.org/10.5539/ijbm.v7n18p49 Abstract Islamic banks use finance leases as a mode of financing, after incorporating major alterations in the structure of the contract in order to meet Shariah principles. In this case, the contract is called ‘Ijarah Muntahia Bittamleek’. As different structures might lead to different accounting results, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issued Financial Accounting Standards to tackle the accounting treatment for such transactions. The paper criticised the accounting treatment offered by AAOIFI for violating the matching principle and lacking faithful representation. Suggested amendments for accounting treatments are also proposed. Keywords: Ijarah, lease, Islamic accounting, Accounting and Auditing Organization for Islamic Financial Institutions...
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...Professor Chen Re: The 2nd case STARBUCKS Brief: The case includes some proposals from the IFRS about the lease accounting and a response from the Starbucks in which the Starbucks expressed its negative attitude and its reasons why it oppose those proposals. Then, in this write-up, our group is going to analysis the influence of leases and lease accounting on Starbucks. The importance of lease on Starbucks From the case, we know that Starbucks leases retail stores, roasting and distribution facilities and office space etc. After an explicit analysis and detailed discussion, we also understand that these lease related activities and issues play a very important role in Starbucks’ business activities. After an introductory accounting course we had taken, we realize that leasing can reduce risk of obsolescence. With more leases, there will be little or no down payment. And these positive effects are preferred choices for managers, especially for the Starbucks’ managers who have a lot of leases activities. Actually lease makes Starbucks hold more available cash which could be invested to other aspects, allowing it to build up more stores and capturing the market rapidly. Thus, leases are important for Starbucks. The importance from lease accounting We already know that many of Starbucks’ business activities are leases, such as leasing retail stores, roasting and distribution facilities and office space etc, so it is better to use lease accounting to accomplish Starbucks’...
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...A finance lease or capital lease is a type of lease. It is a commercial arrangement where: the lessee (customer or borrower) will select an asset (equipment, vehicle, software); the lessor (finance company) will purchase that asset; the lessee will have use of that asset during the lease; the lessee will pay a series of rentals or installments for the use of that asset; the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee; the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price); The finance company is the legal owner of the asset during duration of the lease. However the lessee has control over the asset providing them the benefits and risks of (economic) ownership.[1] Treatment in India : Finance lease is the one in which risk and rewards incidental to the ownership of the leased asset is transferred to lesee but not the actual ownershipship. Thus in case of finance lease lease we can say that notional ownership is passed to the lesee. Treatment in the United States Under US accounting standards, a finance (capital) lease is a lease which meets at least one of the following criteria: ownership of the asset is transferred to the lessee at the end of the lease term; the lease contains a bargain purchase option to buy the equipment at less than fair market value; the lease term equals or exceeds 75% of the asset's estimated useful...
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...Statement of Financial Accounting Standards No. 13 FAS13 Status Page FAS13 Summary Accounting for Leases November 1976 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT 06856-5116 Copyright © 1976 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board. Page 2 Statement of Financial Accounting Standards No. 13 Accounting for Leases May 1980 CONTENTS Paragraph Numbers Introduction ................................................................................................................ 1– 4 Standards of Financial Accounting and Reporting: Definitions of Terms .................................................................................................. 5 Classification of Leases for Purposes of This Statement ........................................... 6 Criteria for Classifying Leases (Other Than Leveraged Leases).......................... 7– 9 Accounting and Reporting by Lessees .............................................................. 10– 16 Accounting and Reporting by Lessors............................................................... 17– 23 Leases Involving Real Estate.........................
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...2 Accounting Standards Learning objectives After studying this chapter, you will be able to: ♦ ♦ 1. Understand the provisions of the Accounting Standards specified in the syllabus. Solve the practical problems based on application of Accounting Standards. Introduction Accounting Standards (ASs) are written policy documents issued by expert accounting body or by government or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. The accounting standards aim at improving the quality of financial reporting by promoting comparability, consistency and transparency, in the interests of users of financial statements. Good financial reporting not only promotes healthy financial markets, it also helps to reduce the cost of capital because investors can have faith in financial reports and consequently perceive lesser risks. You must have already studied the concept, objectives, benefits and limitations, applicability and compliance of Accounting Standards, in detail, in Chapter 1 of “Accounting” Intermediate (IPC) Course Study Material – Group I. We shall discuss the Accounting Standards (specified in the syllabus) in this chapter taking individual standard in detail. 2. Overview 2.1 AS 4: Contingencies and Events Occurring After the Balance Sheet Date Accounting Standard 4 ‘Contingencies∗ and Events Occurring after the Balance Sheet Date’ covers accounting treatment of ∗ Pursuant...
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...The Malaysian Institute of Certified Public Accountants DISCUSSION PAPER TAX IMPLICATIONS RELATED TO THE IMPLEMENTATION OF FRS 117: LEASES Prepared by: Joint Tax Working Group on FRS Date of issue: 22 January 2010 Tax Implications Related to the Implementation of FRS 117: Leases Disclaimer: This document is meant for the purpose of discussion only and the Malaysian Institute of Accountants, The Malaysian Institute of Certified Public Accountants and the Chartered Tax Institute of Malaysia (“the Institutes”) are not, by means of this document, rendering any professional advice or services. This document is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a professional advisor. Whilst every care has been taken in compiling this document, the Institutes make no representations or warranties (expressed or implied) about the accuracy, suitability, reliability or completeness of the document for any purpose. The Institutes, their Councils and Council members, Committees and Committee members, Working Groups and Working Group members, employees and agents accept no liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this...
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... ➢ Introduction ➢ Changes in Leasing accounting ➢ Effect of the changes on the industry ➢ Conclusion A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset for a certain time. Leasing is a common activity and agreement, which appears on company’s financial statement all the time, no matter fortune 500 companies or startup firms. Most of the companies will rent tangible property including office and machines that is called rental agreement. When it comes to accounting, leasing becomes one of the most important sources of the financial statement. Since 1977, Financial Accounting Standards Board (FASB) set accounting standards to regulate leases that show on financial statement. However, current accounting rules for leases unable to meet the needs of users of financial statements because they do not provide a truthful representation of leasing transaction (Financial Accounting Standards Board). As a result, Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) decided to create joint project to redefine the accounting rules for leases (IFRS 1). Therefore, the draft of new accounting standard were made in 2010 and expected to be applied in 2013. The FASB and IFRS have proposed various changes, which should be implemented within leasing accounting. In accordance to resolutions made by the boards...
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...CASE STUDY GROUP ASSIGNMENT. Answer (A) Provision 1 According to ASC 840-10-55-10, “amounts paid in consideration for a guarantee by an unrelated third party are executory costs and are not included in the lessee’s minimum lease payments.”2 The external legal counsel fee of $500,000 that Thurber paid to Stipe, Berry, Mills and Buck LLP in connection with negotiating the lease agreement are executory cost because they are all third parties that guarantee for the lease agreement. They are not involved in the lease term. Thurber will have to recognize these costs as expenses. However, the $1 million of legal fees paid to Goliath will be included in the minimum lease payment. Under ASC 840-10-25-6 (e), “fees that are paid by the lessee to the owners of the special-purpose entity for structuring the lease transaction. Such fees shall be included as part of minimum lease payments (but shall not be included in the fair value of the leased property) for purposes of applying the 90 percent test in paragraph 840-10-25-1(d).”1 Legal fees incurred by Goliath are considered as fees for structuring the lease transaction. Therefore, it should be included in minimum lease payment. Provision 2 If any of those conditions do not exist, then the maximum amount that the lessee could be required to pay under the default covenant shall be included in minimum lease payments for purposes of applying paragraph 840-10-25-1 (d).”1 Thurber will be in default under the...
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... (NAME OF COMPANY IN CASE) Date: September 24, 2012 (DATE ASSIGNMENT DUE) Prepared by: Really Smart Senior (YOUR NAME) Reviewed by: Professor Robert Elya ISSUE: Accounting for ABC’s sale-sublease-leaseback of solar equipment with customers and third party investors. (THIS TOPIC/ISSUE LINE SHOULD SUCCINCTLY DESCRIBE THE OVERALL ACCOUNTING ISSUE BEING ADDRESSED IN THE MEMO) BRIEF BACKGROUND OF COMPANY (THIS SECTION IS DESIGNED TO PUT THE ISSUE IN CONTEXT) THIS SECTION SHOULD BRIEFLY DESCRIBE THE IMPORTANT INFORMATION ABOUT THE COMPANY THAT A READER OF MEMO WOULD FIND HELPFUL IN EVALUATING THE ISSUE, INCLUDING NATURE OF ITS BUSINESS, RELATIVE SIZE (TO PROVIDE DEGREE OF MATERIALITY OF ISSUE TO THE COMPANY’S OVERALL FINANCIAL STATEMENTS),PUBLIC/PRIVATE (TO DETERMINE SEC CONSIDERATIONS), AND AN INTRODUCTION TO THE OVERALL QUESTION BEING ADDRESSED ABC Company is a publicly held alternative energy firm that develops and leases solar panel technology to residential, government and commercial markets. As of December 31st, 2011, ABC Company recognized $X billion in revenue for the sale, lease and installation of photovoltaic solar systems. Customers have the choice of either purchasing or leasing ABC’s solar panels. ABC Company is currently involved in a sale and leasing arrangement involving residents and third party investors. KEY CONSIDERATIONS INVOLVED IN THE ACCOUNTING QUESTIONS (IN THIS SECTION YOU WILL BREAKDOWN THE OVERALL ACCOUNTING QUESTION INTO ITS COMPONENT...
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...Accounting for Leases Rae Girl ACC306 Intermediate Accounting II Professor Bill Wax August 21, 2015 Accounting for Leases Leasing is a commonly used financing vehicle in both personal and business arenas because the lease allows the parties to accomplish a sales-type transaction that benefits each without the commitment of an outright purchase on the part of the lessee. While the basic concept of a lease is simple, there are many complexities in theory and practice that have given rise to much discussion in the accounting profession. Still, leasing is a popular instrument and accountants must fully understand the methodology of decision-making and accounting for leases in order to properly reflect these transactions in a company’s financial statements. Simply defined, a lease is a contract between a lessor, the owner of an asset, and a lessee, the user of the asset. In other words, the lessor gives legal rights over the asset for a specified period of time to the lessee through a contractual agreement called a lease. The lessor retains legal ownership of the asset while the lessee has the right utilize the asset in business operations without having to purchase the asset outright. For this reason, in many instances, leases can be considered a financing vehicle. There are two basic lease classifications. The operating lease is a simple lease to account for because it is considered to be of the nature of a rental agreement. “The fundamental rights and responsibilities...
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...Changes to Accounting Standards for Leases Who is likely to be affected? Businesses which are lessees or lessors of assets and account for lease transactions using a leasing accounting standard which changes on or after 1 January 2011. General description of the measure Current accounting standards are International Accounting Standards (IAS) and UK Generally Accepted Accounting Practice (UK GAAP). Changes to the IAS lease accounting standard are expected during 2011, and changes to UK GAAP might follow in 2013. Legislation will be introduced in Finance Bill 2011 to ensure continuity of tax treatment for lease transactions for businesses which begin to account for the transactions under new accounting standards, expected to be introduced from 2011. The measure will require tax profits and losses to continue to be calculated as if the changes to lease accounting standards had not taken place. Policy objective The measure will ensure that existing tax rules that rely on accounting classifications of leases as operating or finance leases, and the accounting treatment of lease transactions, continue to operate in the way they currently do. The objectives are to: • • ensure that lessors and lessees will be neither disadvantaged nor advantaged by the proposed accounting changes; remove uncertainty for businesses about the future tax treatment of leasing contracts, arising from uncertainty about future lease accounting standards and their interaction with current tax rules;...
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