...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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...Subject: FASB Research Results and Recommendations The Financial Accounting Standards Board (FASB) website offers information on many accounting subjects. Per your request I have researched the FASB website for information on leases and lease structure issues, in particular the current practices and thought related to direct financing, sales type, and operating leases. The following is a brief explanation of the results and also a recommendation of an approach that the client can use to evaluate and capitalize on the opportunity of adding the new customer. The FASB has outlined certain criteria for classifying leases as either capital leases or operating leases. In SFAS No. 13 the criteria for classifying a lease as a capital lease are; the lease transfers ownership, the lease contains a bargain purchase option, the lease term is equal to 75 percent or more of the estimated remaining economic life, and at the beginning of the lease term the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any related investment tax credit retained by the lessor (Schroeder, Clark, & Cathey, 2011). The lease only has to meet one of those criteria to be a capital lease. If none of these criteria are met then the lease is classified as an operating lease. Leases can also be classified as a sales type lease or a direct financing lease. For a lease to be classified as a sales type or direct financing lease the lease would have...
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...Acct 525 June 22, 2014 Over history, corporations have increased cross-border activity and increased foreign direct investment in various countries. As these international activities have evolved, the concept of having one worldwide set of accounting practice standards has been talked about in various depths and stages along the way. There have been attempts to make international financial reporting more streamlined. This paper is intended to discuss the international financial reporting standards as they relate specifically to the United States convergence of U.S. GAAP to IFRS. The Financial Accounting Standards Board (FASB) is an organization of people who are assigned the task of developing U.S. GAAP (Generally Accepted Accounting Principles). The SEC (Securities Exchange Commission) recognizes U.S. GAAP as the rulebook for public companies in the United States to prepare financial statements. Similarly, the International Accounting Standards Board (IASB) is an organization assigned the task of developing IFRS (International Financial Reporting Standards). With the realization that there would be great benefit for the United States to develop accounting practices more accepted internationally, the IASB and FASB joined together in Norwalk, Connecticut in 2002 to discuss the common goals for international reporting. This meeting resulted in “The Norwalk Agreement” which produced a Memorandum of Understanding that says “each acknowledged their commitment to the development...
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...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. But this article...
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...current practices and thoughts relating to direct financing, sales type and operating leases in regards to lease types and structure by the Financial Accounting Standards Board (FASB). A lease is defined as a contractual agreement a lessor and a lessee. The lessor is the organization who owns the property or asset, in this situation trucks. The lessee is the company that wishes rent the asset, trucks, for specific amount of time. For accounting purposes, operating or capital lease, the type of lease must be determined. There are four criteria used to determine the type of lease and the accounting method used in conjunction with each. The four criteria are: 1. Transfer of Ownership by which the asset is transferred to the lessee at the end of the lease term. 2. Bargain purchase option where the lease agreement contains a an option for the lessee to purchase the asset at a significantly reduce price below fair market value. 3. The lease term is equal to or greater than 75 percent of the estimated economic life of the asset, unless the lease begins during the last 25 percent of the asset’s economic life. 4. Minimum lease payments are equal to or greater than 90 percent of the fair market value of the asset at the onset of the lease agreement. This excludes associated costs such as insurance, maintenance and taxes paid by the lessor. (Financial Accounting Standards Board, 2008 section 840-10). Minimum lease payment calculation does not pertain if the lease is entered...
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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...
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...Date: | November 30, 2015 | Re: | FASB research results | | | As you requested, I have completed the research on the lease types and lease structure issues on the Financial Accounting Standards Board (FASB) website for the Lone Star Trucking Company. I did specific research on direct financing, sales type, and operating leases. After going over the information I have, I will provide you my recommendation for handling the client’s situation According to the FASB, both the client and the client’s potential new customer need to determine if their arrangement will meet one or more of these four criteria: 1. Transfer of ownership – the potential lease will transfer ownership of the property to the lessee at the end of the designated lease term (fasb.org). The client will have met this criterion if the lease agreement provides for the transfer of title at or shortly after the end of the lease term. Usually, there is a nominal fee that is required by statutory regulation to transfer title. 2. Bargain purchase option – the potential lease will contain a bargain purchase option, where the lessee will have the option to purchase the asset for a percentage less than the fair market value (fasb.org). 3. Lease term - the potential lease term is equal to 75 percent or more of the estimated economic life of the lease property (fasb.org). 4. Minimum lease payments - the present value at the beginning of the lease term of the minimum lease payments, excluding any portion of...
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...2016-02, Leases (Topic 842) On February 25, 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The accounting by organizations that own the assets leased by the lessee—also known as lessor accounting— will remain largely unchanged from current Generally Accepted Accounting Principles (GAAP) (Topic 840 in the Accounting Standards Codification). “The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities,” stated FASB Chair Russell G. Golden. “It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of offbalance sheet accounting, while requiring more disclosures related to leasing transactions. “The guidance also reflects the input we received during our extensive outreach with preparers, auditors, and other practitioners, whose feedback was instrumental in helping us develop a cost-effective, operational standard,” added Mr. Golden. Why Did the FASB Embark on ...
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...1 ACCT 5321.001 Dr. Martin Taylor FASB/IASB Exposure Draft on Leases The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) published comment a revised Exposure Draft on Leases on May 16th, 2013 and closed on September 13th, 2013. Based on this exposure, two boards claimed that the existing financial reporting of leasing activities fails to meet the needs of users of financial statements. While the existing accounting principles require to record the leased assets and liabilities on the lessee’s financial statements under capital/finance lease but not under operational leases, the new approach would require a lessee to recognize assets and liabilities for all leases with a maximum possible term (including any option to extend) of more than 12 months. This new approach also changes lessor accounting that it more accurately reflect the leasing activities of different lessors. The boards received 786 comment letters in response to the 2010 Exposure Draft from entities and organizations from many industries, including nonpublic entities. Some respondents supported the effects of the proposed model, some respondents disagreed with the lessor accounting proposals. The reasons are that it was not consistent with the single accounting model proposed for lessees; it did not support the performance obligation approach; and the existing lessor accounting requirements still work well in practice. Respondents also concerned with the costs...
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...done the required research on the Financial Accounting Standards Board (FASB) website regarding lease structures and current practices as it would relate to the specific issue at hand with ABC Trucking. All my research has shown that leasing would be an optimum option for the company to consider when leasing the extra trucks according to the requirement of the new potential client. Some of the benefits of leasing are that they will be able to finance all of the cost of the additional trucks without having to use of their own cash, they will be able to keep the trucks off their balance sheet if they choose an operating lease, and a lease will protect them when the trucks will became old and obsolete. Basically, there are two types of leases that ABC Trucking can choose from, below is a brief description and requirements of each: 1. Capital Lease: this is when the agreement for the lease is designed for the lessee acquires the assets and the end of the lease. From ABC Trucking’s perspective, they will be entering into a capital lease if it meets any one of the following four conditions as in paragraph 840-10-25-1 of the FASB Codification: (1) At the end of the lease, the lessee becomes the owner of the asset (2) The lease give lessee an choice to purchase the asset for a price that is cheaper than the fair value as dictated by the market forces of the asset (3) The duration of the lease is for a time period which is 75 percent or greater of the estimate time...
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...IASB Agenda ref FASB Agenda ref 3G 274 STAFF PAPER REG FASB│IASB Meeting Project Paper topic CONTACT(S) March 2014 Leases Lease Term Anna Heining Sarah Geisman Scott A. Muir aheining@ifrs.org sgeisman@ifrs.org samuir@fasb.org +44 (0)20 7246 6428 +44 (0)20 7246 6464 +1 (203) 956 3478 This paper has been prepared by the staff of the IFRS Foundation and the FASB for discussion at a public meeting of the FASB or IASB. It does not purport to represent the views of any individual members of either board. Comments on the application of US GAAP or IFRSs do not purport to set out acceptable or unacceptable application of U.S. GAAP or IFRSs. The FASB and the IASB report their decisions made at public meetings in FASB Action Alert or in IASB Update. Objective 1. The purpose of this paper is to discuss the accounting for options to extend or to terminate a lease, both at lease commencement and during the lease term. This paper also discusses the accounting for purchase options. 2. This paper is structured as follows: (a) (b) (c) Summary of the proposals in the 2013 Leases Exposure Draft (“2013 ED”) Summary of feedback Staff analysis and staff recommendations (i) (ii) (iii) (iv) (d) (e) Extension and termination options – initial recognition Extension and termination options – reassessment Purchase options Symmetry between lessee and lessor accounting for options Appendix A – The proposals in the 2013 ED Appendix B – Existing guidance on lease term in IAS 17 and Topic...
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...Accounting Horizons Vol. 26, No. 1 2012 pp. 125–133 American Accounting Association DOI: 10.2308/acch-50087 COMMENTARY Some Conceptual Tensions in Financial Reporting American Accounting Association’s Financial Accounting Standards Committee (FASC) Yuri Biondi, Jonathan Glover, Karim Jamal (Chair and principal co-author), James A. Ohlson, Stephen H. Penman, Shyam Sunder (invited principal co-author), and Eiko Tsujiyama SYNOPSIS: We examine four key conceptual tensions that are at the heart of many financial reporting dilemmas: stocks versus flows, ex ante versus ex post, conventions versus economic substance, and top-down design versus bottom-up evolution as sources of accounting practice. Associated with each of these conceptual dimensions is an accounting duality; in some cases, one side (e.g., stocks) is easier to measure in a reliable manner, while the other side (e.g., flows) is easier to measure in other instances. We suggest that financial reporting would benefit from a willingness to pay attention to, and find compromise between, both sides of these tensions; forcing a choice of one over the other does not serve to improve financial reporting. Keywords: conceptual tensions; stocks-flows; ex ante-ex post; conventions-economic features; design-evolution. JEL Classification: M40. INTRODUCTION I n the developing of financial reporting, accountants have had to repeatedly deal with some basic conceptual tensions that arise due to the very nature of accounting...
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...In 2002 the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) met and issued the Norwalk Agreement where they both agreed to develop of high quality accounting standards. Since that time the FASB and the IASB have been working on joint projects a.k.a convergence projects designed to improve both US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS), eliminate differences between them, and ultimately make the standards fully compatible. In 2010, to increase efficiency the boards decided to focus on the priority projects. Two of those projects, fair value measurement and statement of other comprehensive income, are poised for release. Now, the “big three” remain—financial instruments, revenue recognition, and leases. The IASB is also working to its monster project on insurance contracts, with the FASB closely engaged in the discussion. Therefore, bellow is the list of the active joint FASB/IASB projects according to current technical plan on the fasb.org website: - Accounting for Financial Instruments (Updated November 10, 2011): • Classification and Measurement (Updated November 10, 2011); • Impairment (Updated November10, 2011); • Hedging (Updated November 10, 2011). - Revenue Recognition (Exposure Draft issued November 14, 2011); - Leases (Updated November 15, 2011); - Balance Sheet – Offsetting (Updated August 15, 2011); - Consolidation: Policy and Procedures (Exposure...
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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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...Accounting Standards Codification® Notice to Constituents (v 4.6) About the Codification FASB Accounting Standards Codification® Notice to Constituents (v 4.6) About the Codification Notice to Constituent version numbers - The Notice to Constituents contains a version number indicating the degree of change within a particular version. Versions ending with ".0" represent substantive changes to the text, whereas versions ending with a number other than zero represent editorial or clerical corrections. Page FASB Accounting Standards Codification ................................................................................... 4 Codification Goals .......................................................................................................................... 5 Codification Research System ........................................................................................................ 6 Content Matters............................................................................................................................... 7 Population of codified standards as of July 1, 2009 ................................................................... 7 Standards issued by standard setters other than the SEC ........................................................ 7 Standards issued by the SEC................................................................................................... 8 Essential and nonessential content ................................
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