...This paper will outline the differences in accounting treatment of and criteria for determining whether leases should be accounted for as either a capital lease or an operating lease. I will be limiting my discussion to the accounting treatment of leases by the lessee. This paper will discuss the current accounting treatment for the two types of leases according to Canadian GAAP and will tie in elements of the conceptual framework to the treatment of leases from CICA handbook section 1000, followed by a discussion on accounting theories related to lease treatment, and finally current issues outlined in academic research concerning lease treatment by the lessee. Capital and Operating Leases There are two major classifications of leases. Capital leases and operational leases. A Capital lease is defined in the CICA handbook as “a lease that, from the point of view of the lessee, transfers substantially all the benefits and risks incident to ownership of property to the lessee” (CICA, 2010, Section 3065, ¶3). In order for a lease to be classified as a capital lease, the life of the lease must exceed 75% of the life of the leased item, there must be a transfer of ownership at the end of the lease or a bargain purchase option, and the present value of the lease payments must exceed 90% of the fair market value of the asset (Grossman, A., & Grossman, S., 2010). An operational lease is described by the CICA handbook as “a lease in which the lessor does not transfer substantially...
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...Accounting for Leases Source: Solutions Manual t/a Australian Financial Accounting 7/e by Craig Deegan 11.1 Within AASB 117 a lease is defined as: an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. 11.2 We should capitalise a lease transaction (meaning that the leased asset and lease liability will be placed on the statement of financial position) when substantially all the risks and rewards of ownership pass to the lessee, and the lease payments are deemed to be material. AASB 117 describes the risks and rewards of ownership as follows: Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Rewards may be represented by the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realisation of a residual value. AASB 117 dedicates a number of paragraphs (paragraphs 10 to 12) to assist in determining whether a lease is a finance lease or an operating lease. A finance lease is to be capitalised. These paragraphs state: 10. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: (a) the lease...
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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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...Death of the Operating Lease Running head: DEATH OF THE OPERATING LEASE 1 Death of the Operating Lease and its Impact on Leading U.S. Companies Mark S. Lynn Mount St. Mary’s University Copyright 2010, Mark S. Lynn Death of the Operating Lease Abstract The proposed elimination of operating lease treatment by the IASB and FASB, as outlined in 2 their discussion paper, Leases – Preliminary Views, will have a varying degree of impact on U.S firms. After a review of the evolution of lease accounting and a discussion of financial ratio analysis, this paper examines the impact of the proposed accounting change on common financial ratios of 142 large public companies. The proposal requiring the capitalization of all lease arrangements is generally detrimental to such financial measurements, with significant variability among industry sectors. Through surveys and interviews, it is further determined that while a majority of corporate financial executives do not support the proposed accounting change, they have yet to analyze the impact and prepare for the effects of the change within their own companies. Copyright 2010, Mark S. Lynn Death of the Operating Lease Death of the Operating Lease and its Impact on Leading U.S. Companies 3 “We are only tenants, and shortly the great Landlord will give us notice that our lease has expired.” ~ Joseph Jefferson (1897, p. 476). A lease is broadly defined as a contract by which an owner of property grants to another...
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...Accounting Leases A lease is a contractual agreement between a lessor and lessee that gives the lessee the right to use specific property for usually a monetary payment while the lessor still owns it. For instance, the new Petco (The lessee) in town probably leases the property they are using from the building owners (The lessor). The lease specifies the duration of the agreement and the lease payments. The obligations for taxes, insurance, and maintenance may be assumed by the lessor or the lessee, whichever is defined in the agreement. The advantages of a lease over just buying a property are that lease payments are often fixed, leases may be a less costly means of financing, leases may not require any money down, certain leases may not add to existing debt on the balance sheet, leases may contain less restrictive covenants than other types of lending agreements, and leases reduce the risk of obsolescence to the lease. So if we look back at the example of the new Petco in town, they came in already having competition in town. The risk of putting in the store is pretty high so they would want to lease the property to reduce their financial risk since the probability of them going out of business is a little higher due to the high number of competition already established in town. There are two kinds of accounting methods for leases: operating and capital leases. A vast majority of leases are operating leases. An operating lease is treated like renting where payments...
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...FASB Statement No. 13: Accounting for Leases Asim Yunus ACC 632 – Critique of Accounting Theory Professor Lynch October 16, 2012 FASB Statement 13: Accounting for Leases FASB Statement 13, Accounting for Leases, was established by the FASB and made effective starting January 1st, 1977. As early as 1949, leasing was recognized as an important financial tool by the accounting business when the American Institute of Certified Public Accountants (AICPA) issued Accounting Research Bulletin No. 38, “Disclosure of Long-Term Leases in the Financial Statements of Lessees.” In the 1960s, the APB recognized how important accounting for leases was when they included it in the top five topics that were to be studied by the AICPA’s Accounting Research Division. In 1962, the Accounting Research Study No. 4, “Reporting of Leases in Financial Statements”, was released and eventually APB picked up the subject. For the next ten years, the APB released four opinions (No. 5, 7, 27 & 31) concerning leases which were improved by three AICPA Accounting Interpretations. Even though progress was made when it came to the topic of Accounting for Leases, certain questions remained. The SEC helped out on the topic as well by issuing three pronouncements concerning leases (Accounting Series Releases No. 132, 141 & 147) on October 5, 1973. Like APB Opinion No. 31, Accounting Research Series No. 147 only dealt with disclosure. There were still many holes in the lease accounting practice. The FASB realized...
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...IntroductionASC 840, Leases and FASB Statement No. 13, Accounting for Leases covers the standards of financial accounting and reporting for leases by lessee and lessor. A lease is a contract in which the lessor gives the lessee the right to use an asset (property, plant and equipment) for a specified period of time in exchange for periodic rental payments. The lessor is the owner of the property and the lessee is a tenant or renter. Most frequent examples of assets acquired by lease include automobiles, building space, computers and equipment.NeedsSpace entered into a lease agreement with WeHaveIt to rent space for its corporate offices. The lease is classified as an Operating Lease in accordance with ASC 840, Leases and FASB Statement No. 13, Accounting for Leases. What is an Operating Lease? An Operating Lease is when the lessor gives the lessee the right to use leased property for a limited period of time but retain all the risks and the rewards of ownership. The lease also has a 10 year lease term and there is no option to renew nor is the ability to negotiate for the renewal provided in the lease agreement. Lease term defined in FASB 13 states:“The fixed non-cancelable term of the lease plus all periods, if any, covered by bargainrenewal options, all periods, if any, for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured, all periods, if any, covered by ordinary renewal...
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...Technical Case Studies SOLUTIONS Case: Accounting for Lease Extension (Revised and updated 5/2013) Jack leases an office building from Jill. The lease is classified as an operating lease under the guidance of ASC Topic 840, Leases. The lease does not include any renewal options upon the expiration, but Jack is in the process of negotiating an extension of the lease. Jack proposes to make a single up-front payment of $1.2 million to Jill in exchange for an extension of the lease at the current rate for another 10 years. The extension would create a new lease under ASC par. 9 of 840-10-35-4. 1. 2. Should Jack include the $1.2 million in the calculation of the minimum lease payments when classifying the new lease? Assuming the new lease would qualify as an operating lease under ASC 840, when should Jack recognize the $1.2 million as rental expense? A1: Yes. Jack should include the up-front payment in the calculation of the minimum lease payments. ASC par. 840-10-25-5 defines minimum lease payments from the standpoint of the lessee as “ ...the payments that the lessee is obligated to make or can be required to make in connection with the leased property…,excluding...(a) contingent rentals, (b) any guarantee by the lessee of the lessor’s debt and the lessee’s obligation to pay (apart from the rental payments) executory costs such as insurance, maintenance, and taxes in connection with the leased property. The $1.2 million is not a contingent rental, a guarantee of Jill’s ” debt...
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...Edward Logie Accounting 304_01 10/28/2015 Writing Assignment 5 New Lease Accounting Standard On October 7 the FASB held it last decision meeting on their new lease accounting convergence project. The project is a joint project between the FASB and the IASB to change how leases would be recognized. Before leases may or may not have to be recognized on the lessee’s books. The new rule would require lessee to recognize the assets no matter what. The FASB originally was looking to implement the new standard by the end of 2015, but that will not happen. The transition will most likely take place somewhere in 2019. In the article “Lease Accounting Standard New Start Date Likely 2019” they talk about the difficulties faced by companies with this change. The first being that this change comes right along with the changes in revenue recognition, making this a balancing act become for companies to update to the new standards. Second most companies are not ready to take on this change. As stated in the article “Last year Deloitte found that almost 80% of the executives it surveyed were not ready for the standard, citing the quality of data, the complexity of compliance, and a lack of confidence in IT systems as the main concerns for companies.” The reason why I picked this article is because in class we most of the time take about the reasoning and methods and accounting entries that happen with transactions and how changes in practice affect how we recognize these transactions...
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...Financial Accounting Theme 1: "Accounting for leases – Financial versus Operational Leases impacts on financial statements and on financial analysis." "Accounting for leases – Financial versus Operational Leases - impacts on financial statements and on financial analysis" A lease is a contractual agreement between two parties for the hire of an asset. The lessee – user of the asset – will pay a lease rent to the lessor – owner of the asset – to be able to use it during a certain period. At the end of the lease the asset is returned to the lessor. A lease is then just another source of capital and firms may find them preferred solutions to buying for a variety of reasons. First, the lessor may have access to cheaper capital on the markets and be able to pass on past of the resultant savings to the lessee. Then, leases normally involve smaller transaction costs than bonded debts and may offer more flexible contract terms. Additionally, there are normally tax benefits associated. A particular situation where leases may be of great help is when trying to setup new businesses. The budget is usually tight and the access to capital markets more difficult and expensive than for well established companies. In this situation, leasing allows to avoid heavy upfront costs and obtain more equipment sooner. It may be even possible to defer payment for a while and give the company opportunity to put business running smoothly before getting into heavier expenses. All leases are classified...
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...Chapter 15 Homework Exercise 7- American Food Services, Inc made a lease agreement $4 million (FV & PV) 4 equal payments at end of each year. Useful life is 4 years no residual value. Interest rate implicated is 10%. 1. Prepare journal entry for American Food Services at Jan 1 2011. Lease Equipment (packaging machine) 4,000,000 Lease Payable(packaging machine) 4,000,000 2. Prepare amortization schedule for the four-year term. Date | Payment | Interest | Principle | Balance | 1/1/11 | - | - | - | 4,000,000 | 12/31/11 | 1,261,881 | 400,000 | 861,881 | 3,138,119 | 12/31/12 | 1,261,881 | 313,812 | 948,069 | 2,190,050 | 12/31/13 | 1,261,881 | 219,005 | 1,042,876 | 1,147,174 | 13/31/14 | 1,261,881 | 114,707 | 1,145,174 | - | 3. Prepare journal Entry for the first lease payment 12/31/2011. Interest Expense 400,000 Lease Payable 861,881 Cash 1,261,881 4. Prepare journal entry for third lease payment 12/31/13 Interest Expense 219,005 Lease Payable 1,042,876 Cash 1,261,881 Exercise 8-Gerogia-Atlantic, Inc., leased warehouse facility from IC Leasing Corporation. 3 year agreement semiannual payments $562,907 first payments June 30, 2011. Borrowing rat is 10%. Fare market value is 3 MILLION. 1. Preset value of lease payment at June 30, 2011. The present value of the lease payment is $562,907*(n-6. I-10%)=3 million 2. What pretax amounts related to lease on balance sheet dec 31 2011. Georgia-Atlantic Inc Partial Balance...
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...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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...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 of the property, we labeled this as a capital lease. In calculating the present value of the minimum rent payments...
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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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