...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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...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 of high-quality compatible accounting standards that could be used for both domestic and cross-border financial reporting.” At this time, a timeline was set to start reviewing the inconsistencies in both sets of standards and start to work...
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...2011 Re: ABC Trucking Co. assignment results Message: These are the results of the assignment given to me by you last week regarding ABC Trucking company potential new client. I have 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...
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...Client Memo To: Bob Supervisor From: CC: Joe Schmoe, Schmoe Trucking Date: 8/26/2013 Re: Leasing Options Schmoe Trucking has been presented with an opportunity that will require adding an additional 20 trailers to the ones they currently own. While there is an uncertainty to the length of the potential relationship, there is considerable potential for growth. As requested, I have spent the past few days examining the current FASB standards on leases to determine what the best course of action for Schmoe Trucking would be. There are a number of options when it comes to leasing, and it is vital that each option is examines in order to determine the proper course of action. There are a few things about leases that must be looked at before determining how to proceed. Leases are broken down into two categories; operating leases and capital leases. A capital lease is one that meets certain criteria and capital leases can be broken into subcategories; sales type leases and direct financing leases. We will be looking at the differences between sales type leases, operating leases, and direct financing leases in relation to the proposed acquisition of additional trailers. The first step is to determine if a lease is an operating lease or a capital lease. A capital lease will meet at least one of the following criteria. SAFS No. 13 outlines the capital lease criteria to be as follows; transfer of ownership of the leased item upon completion of the lease period...
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...Leasing Customer Inserts His/her Name Customer Inserts Name of Tutor Customer Inserts Grade/Course (December 11, 2011) Outline ➢ 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...
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...Response to Client Request I Erica R Ford ACC/541 October 7, 2013 Professor Michael Meyer Response to Client Request I Memorandum October 7, 2013 To: Raelynn Floyd, Supervisor of Standards From: Erica Ford, CPA Re: FASB Lease Structures and types As per your request I have diligently conducted research to advise our clients of the best leasing option in regards to their current business proposition. Recently, I was informed last week of the new venture and the need to acquire 20 additional trailers to satisfy a job. The deal has a potential to be lucrative, therefore we must consider what leasing structure will work best for the client. The best sources to obtain information on leasing requirements and reporting is the FASB, Financial Accounting Standards Board. There are three components of leasing that I will discuss, directing financing, sales type and operating lease. Furthermore, I will make a recommendation based on the findings and current market conditions. Direct Financing Under the direct financing method, the lessor is essentially viewed as the lending institution for revenue recognition purposes (Schroder, Clark & Cathey). Direct financing is also considered a capital lease if it meets the criterion. To be classified as a direct financing lease the lease must meet one of the four following criteria set forth by SFAS No. 13: (1) the lease transfers ownership of the property to the lessee by the end of the lease term; (2) the...
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...includes research on leases and lease structure. Through intensive research on the Financial Accounting Standards Board (FASB), three sub-types of leases were found for lessors to account for the leases. The three sub-types are direct financing, sales-type, and operating leases. The international accounting standards board (IASB) and FASB are proposing a draft for lease accounting. The critics are disputing some of the concerns with operating lease financial reporting. This memo will address the proposal changes for operating leases. Also included is a lease type recommendation for the client. According to FASB ASC 840-30-05-4 (2009), lease capitalization includes direct financing and sales-type leases. These types of leases are recognizable by meeting one of the four criteria’s. A lessee under the capital lease method recognizes the lease according to FASB ASC 840-30-25-1 (2009), as an asset and as a commitment. The lessee accounts for the lease commitment in accordance to FASB ASC 840-30-30-1 (2009), at inception when the amount is equal to the present value (PV). In addition, the lease term will exclude the payment portion that represents specific cost such as insurance, maintenance, and taxes. For capital leases, a lessee recognizes lease assets and liabilities on the balance sheet (FASB, 2013). The lessee will determine the amount to record in accordance with FASB ASC 840-30-55-6 (2009), the minimum rental payments over the lease term is the number of months of...
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...Group 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...
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...can for his regional trucking company. The opportunity offered to this client could potentially be very profitable if handled in the correct manner. The client has the option to either purchase twenty more trailers to accommodate this customer or use an alternative means of acquiring these assets known as leasing (Schroeder, 2011). I will explain leases and lease structure issues of several different types of leases including direct financing leases, sales type leases, and operating leases which could greatly benefit this client. A lease is a contractual agreement between the lessee, or the user, to pay the lessor, or the owner, for the use of an asset or services. Leases are classified under the Financial Accounting Standards Board (FASB) under the number 840. The lessee is the receiver of the services or assets under the lease agreement, and the lessor is the owner of the services or assets (Statement, 1976). The lessee agrees to make payments to the lessor in exchange for temporary ownership of the assets. Under certain lease agreements, the lessee may be given the option to purchase the asset at the end of the lease term or return the asset to the lessor (Leasing, 2012). Direct Financing Leases A direct financing lease, also known as a direct...
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...to: Anthony bedricky, cfo from: [ zhy ] subject: comment memo on leases ed date: july 8, 2013 ------------------------------------------------- The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) developed common lease accounting requirements to ensure that assets and liabilities from lease contracts are recognized in the balance sheet. August 17, 2010, the FASB issued Proposed Accounting Standards Update – Leases (Topic 840). Because leasing is an important source of finance, the board issued an Exposure Draft (ED) to ensure that this development would be with a complete and understandable picture of an entity’s leasing activities. Following are my opinions about some important questions regarding Proposed Accounting Standards Update – Leases (Topic 840). 1a. Do you agree that a lessee should recognize a right-of-use asset and a liability to make lease payments? Why or why not? If not, what alternative model would you propose and why? I agree that a lessee should recognize a right-of-use asset and a liability to make lease payments. The right-of use concept is an accounting treatment that places assets and liabilities from a leasing contract on the balance sheet of lessees. This treatment would reflect in the financial statement that leased assets and liabilities would be placed on the balance sheet. It would also suitable to most leases agreement. 1b. Do you agree that a lessee...
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...Accounting Theory February 14,2012 Should economic consequences be considered by the FASB in the accounting standard setting process? Yes, the FASB should consider economic consequences in the accounting standard setting process. Ever since the creation of the FASB in 1973, it was charged with establishing standards of financial accounting and reporting in the most efficient and complete manner possible. The goal of the FASB is to maintain a neutral stance and set standards that will be helpful in predicting cash flows and in assessing managerial performance. The objectives as stated in FASB Statement of Concepts 1 stem primarily from the needs of external users who lack the authority to prescribe the information they want and must rely on information management communicates to them. Standards have the ability to impact earnings which can adversely affect management compensation, debt covenants, financial ratios, bond ratings, analyst recommendations, and stock price. Because of the impact standards can have, the accounting standard setting process has been the target of self-serving groups. The FASB rule making process has been criticized for passing standards that benefit one group at the expense of another. The criticism comes from the ability of lobbying, special interest groups and government institutions to affect the accounting standard setting process. The accounting standard setting process should be insulated from politics however should still be able to consider...
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...To: Supervisor From: Date: September 10, 2012 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...
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...How the new standard is aligned with IASB? The existing standard under IFRS provides some principals under which a finance lease can be recognized. The accounting method for a finance lease and for an operating lease is different. In the leases-joint project of IASB and FASB, opinions about accounting method of lessee divided under two accounting systems. FASB uses a dual approach and IFRS uses a single approach for lessee accounting. Under the single approach, a lessee will recognize all leases as “Type A” leases, which means recognize amortization of the right-of-use (ROU) asset separately from interest on the lease liability. Under IFRS, there are exemption of small-ticket leases and short-term leases for the accounting of lessee. For small-ticket leases, there is no clear benchmark about the classification of “small”. But short-term leases are leases that have leasing term of 12 months or less. Financial reports need to disclose more information weighing the cost. Considering this exemption is for the convenience of companies with insignificant leases, we design the line of 1% of total asset amount. As far as we concerned, comparing to the time limit, the proportion can reflect more precisely the impact on the company. Besides, for a small corporation, making an option for a lease whether to be finance lease or operating lease will cause a huge change of revenue of this year. In other words, we propose a new criterial for defining small assets and small-ticket leases....
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...companies and auditing firms began to realize the importance of the establishment of a single set of high quality accounting standards. With a common accounting language around the world, investors will be able to have greater comparability and greater confidence in the transparency of financial reporting worldwide. IFRS, acronym for International Financial Reporting Standards are financial reporting standards that have been adopted by International Accounting Standard Board (IASB). Increasing number of publicly held companies in many countries are now requiring or allowing the use of IFRS for the preparation of financial statement. In the United States, the Securities and Exchange Commission (SEC) have also proposed a “Roadmap” in incorporating the convergence of US Generally Accepted Accounting Principles (US GAAP) to IFRS with the help of Financial Accounting Standards Board (FASB) and IASB. The IASB and FASB, committed to improving IFRS and US GAAP and achieving their convergence, are also committed in providing public transparency and accountability by reporting their process in achieving their goals. In 2006, the IASB and FASB began to set out their plans of completing major projects in their issued Memorandum of Understanding (MoU). These priority major projects comprises of their joint projects on financial instruments, revenue recognition, leasing, insurance contracts, the presentation of other comprehensive income, fair value measurement, and the consolidation of investment...
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...Accounting Standards Board ACC/541 Accounting Standards Board Currently the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are working on a joint venture known as the Norwalk Agreement that will most likely affect current and future individuals within the accounting field. Discussed within is the relationship between the IASB and FASB, the IASB equivalents of the original FASB pronouncements, and how a Master’s of Science in Accountancy program can prepare a student for a professional life within the field that will likely be affected by both boards. The History and Relationship of the IASB and FASB In 1973 both the FASB and International Accounting Standards Committee (IASC) were formed. FASB was created with the mission to establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities providing decision-useful information to investors and other users of financial reports (Financial Accounting Standards Board, n.d.). The IASC began as the first body to set international standards and in 2001 the IASC became independent and further known as the IASB. Since 2001 the IASB has issued multiple International Financial Reporting Standards (IFRSs) that are currently permitted or required for more than 100 countries. In 2002 FASB and IASB began working with each other to improve and converge U.S. generally accepted accounting principles (GAAP) and IFRS (Financial...
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