...should NeedsSpace account for the two obligations noted as provisions in the lease agreement? ● Provision 1: “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.” By entering the lease agreement, NeedsSpace (the lessee) becomes legally and contractually responsible for performing general repair and maintenance on the leased premises. Assuming that the lessee is required to make deposits to financially protect the lessor concerning the maintenance obligation by setting up a reserve, the guidance in ASC 840-10-05-9A through 840-10-05-9C states that the maintenance reserve shall be recognized as a deposit asset and reimbursed later when the required repair and maintenance is completed by the lessee. However, the provision in the lease agreement does not call upon the lessee to make deposits but simply requires the lessee to perform repair and maintenance on the leased premises. Alternative 1: Accrual Method Since there is a contractual liability for the lessee to perform general repair and maintenance, the maintenance requirement provision may be assumed as a present economic obligation, not just a future commitment. If the fair value estimate of future maintenance expense can be measured with sufficient reliability, the provision may lead to recognition of an accrued liability for the repair and maintenance performance obligation at the inception of the lease. The accrued liability for the repair and maintenance can be reversed when...
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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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...Summary Needspace entered a operating lease with WeHaveIt for 10-Year Lease term.Lease agreements have certain provisions depending on how the contract is written by the lessor to the lessee and what type of lease agreement. In this lease agreement we are focusing operating lease with provisions of NeedSpace and WeHaveIt, which has a 10 year lease term, no options to renew or negotiate renewal offered in the contract and the lessee incurs certain cost, repairs and maintenance. In regards to ASC 840 leases, according to 840-10-20 and 840-10-05-9A, 840-10-05-9B an operating lease is when the lessor the owner of the property gives the lessee the right to use property, plant or equipment for a limited amount of time. Meaning the lessee is responsible by a legal contract to make repairs and maintain leased property. To make sure the lessee adhere to the contract the lessee has to make financial deposits to the lessor called supplemental rent or maintenance reserves. Furthermore, the lessor is required to repay the lessee when all repairs and maintenance is completed to the extent of the amount of the deposits. In some instances, when the cumulative maintenance costs is less than the cumulative deposits over the period of the lease contract. Upon expiration of the lease the lessor maybe entitled to keep the excess deposits depending on the lease agreement. How should NeedsSpace account for the two obligations noted as provisions in the lease agreement? Analysis and Solution ...
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... 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 into one of two...
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...Acct 306 Case Project Memo: To: Joe Carpet of NeedMoreRoom, Inc. From: Date: August 5, 2012 Subject: Accounting for lease obligation The proper treatment for the first provision in the lease agreement stating, “Lessor requires the lessee to perform general repairs and maintenance on the leased premises.” It should be addressed as follows: The proper treatment for the second provision in the lease agreement stating, “Lessor requires the lessee to remove all leasehold improvements such that the premises are reinstated to original condition.” It should be addressed as follows: 840-20-25-11 Leasehold improvements are investments made to customize buildings and offices occupied under operating lease contracts to make them suitable for the intended purpose. The present value of estimated reinstatement costs to bring a leased property into its original condition at the end of the lease, if required, is capitalized as part of the total leasehold improvements costs. At the same time, a corresponding liability is recognized to reflect the obligation incurred. Reinstatement costs are recognized in profit and loss through depreciation of the capitalized leasehold improvements over their estimated useful life. With the exception of investment properties, property and equipment is carried at cost less accumulated depreciation and accumulated impairment losses and is periodically reviewed for impairment. The useful life of property and equipment is estimated on the...
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...GLOBAL AVIATION GROUP 2013 Airline Disclosures Handbook Financial reporting and management trends in the global aviation industry kpmg.com KPMG’s Global Aviation practice KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 156 countries and have 152,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Through its member firms, KPMG has invested extensively in developing an experienced aviation team. KPMG’s understanding of the aviation industry is both current and forward looking, thanks to KPMG’s global experience, knowledge sharing, industry training and use of professionals with direct experience in the aviation industry. KPMG member firms serve many of the market leaders within the airline sector. We are leading providers of external audit services with 33% market share of the top 50 airlines by revenue. We also provide other services to over half of these top 50 airlines. KPMG member firms’ strength lies in our professionals and their knowledge and experience gathered from working with a large and diverse client base. KPMG’s airline industry experience helps the teams understand both your business priorities and the strategic issues facing your company. KPMG’s Global Aviation practice’s presence in many international markets, combined with industry knowledge, positions KPMG...
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...Abstract This paper attempts to discuss current GAAP treatments of both convertible bonds and redeemable preferred stock. This paper will also demonstrate an example as to how the accounting would change on financial statements in regards to these securities. It takes into account present effects as well as future years; in addition it also considers the conversion of bonds as well as how debt covenant restrictions effect these financials. The paper also documents how both capital and operating leases are accounted for in varying situations. It does not examine criteria for designation between the two, rather how they are handled in regards to common situations. The author adds his own thoughts and provides commentary on these topics and gives consideration to the methodology to which they are accounted for. Alternate Financing Decisions Companies take part in many activities that are recorded in their financial statements. They have sales, expenses, production costs, financing activities, assets & liabilities just to name a few. The inflows and outflows of cash needs to be monitored budgets need to be made and management needs to make important decisions regarding the direction the company is going and how they are going to get there financially. This could end up in the taking out lines of credit, selling assets or looking in to other alternate financing methods such as convertible bonds or the issuance of preferred stock. Baker Company a theoretical company in our text...
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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 for leases: Change is coming. By Matthew Rodgers and Peter McElwain, Baker Tilly September 21, 2010 Leasing of equipment, real estate, and other assets has been and continues to be a significant source of financing for businesses in all industries. As a result, the financial reporting rules for the treatment of lease transactions can be significant to the financial statements and the business operations of lessees and lessors alike. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have undertaken a joint project on leases to improve the financial reporting for lease transactions. The financial reporting standards in the United States currently provide that all lease transactions will be accounted for in one of two ways depending on facts, circumstances, and to some degree the judgment of the users. The two alternative treatments, referred to as operating leases and capital leases, have dramatically different consequences on the financial statements of both lessees and lessors. There are a number of perceived weaknesses in these rules and the manner in which they are applied, which many believe result in inconsistent and incomplete reporting and presentation of an entity’s leasing activities. In response, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have undertaken a joint project on leases to improve the financial reporting for lease transactions...
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...January 1, 2014, NeedMoreRoom, Inc. (NMR) entered into a lease agreement with WeRentSpace, Inc. (WRS) to rent space for its corporate offices. Based on the lease agreement, the lease is properly classified as an operating lease. The lease has a 10-year lease term (expires on December 31, 2023), and there is no option to renew nor is the ability to negotiate for renewal provided in the lease agreement. In addition, the lease agreement contains two provisions that require NMR to incur certain one-time costs at the end of the lease term. The provisions include the following: 1. “Lessor requires the lessee to perform general repairs and maintenance on the leased premises.” 2. “Lessor requires the lessee to remove all leasehold improvements such that the premises are reinstated to original condition.” At the beginning of the lease, NMR placed into service various leasehold improvements (e.g., temporary walls, HVAC, carpeting) that have useful lives of 10 years and no residual value. Required: a. How should NMR account for the first obligation noted above? b. How should NMR account for the second obligation noted above? Hint: The proper accounting treatment for each obligation is one of the following: -account for it as a minimum lease payment -account for it as an asset retirement obligation -account for it as an expense when it is incurred For each obligation, explain which of the three options is the proper accounting treatment. Also, prepare (without numbers) and briefly explain...
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...Simulation Review Paper Vicky Davis HCS/405 September 12, 2011 Kristin McFarland Simulation Review Paper Financial Accounting from a Cardiac Care Hospital’s Perspective In 1975, the first hospital that was constructed in Kelsey is Patton-Fuller Community Hospital. They are most often dedicated to provide quality customer care; they specialize in programs that can maintain the health and welfare of the local community and other population. Patton-Fuller Health Care is a not-for-profit Community Hospital that services care such as emergency medical care, labor, delivery, physical therapy, radiology, cardiology, and surgery for all adults and children. In this paper I will be analyzing financial indicators for decision-making to understand the strengths and weaknesses of a Cardiac Care Hospital. In addition, I will be implementing strategies to improve the cash flow at Elijah Heart Center (EHC). At the same time, I will also be evaluating the funding options for obtaining medical equipment, and also the funding strategies for the success or failure of capital expansion (Apollo Group, 2011). On behalf of the summary and conclusion, I will need to explain what I learned from this simulation, what I would do differently if I performed the simulation over again, and following how I would apply what I have learned at my current or future job (Apollo Group, 2006). Phase I: Capital Shortage The board members at Elijah...
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...Within the accounting profession, there have been challenges to develop a set of standards that are generally accepted and universally practiced. Thus far, the main debate in setting accounting standards is “Whose rules should we play by, and what should they be?” While the answer is unclear, users of financial statements and reporting must find methods that has an universal objective, that allows “Grapes for Grapes” comparisons that clearly, fairly, and completely prepares a company financial statements. For years GAAP has been the common set of standards and procedures for the U.S, the core for establishing a principle of reporting but now IFRS an international friendly financial reporting system has become popular for its use globally. In the text Intermediate Accounting by C.P.A Kieso, GAAP also known as generally accepted accounting principles are standardized guidelines and procedures to financial accounting and reporting. There are three major parties that are involved in the standard setting where U.S companies must abide by. Securities and Exchange (SEC), established by the federal government to help create and regulate financial information presented to stockholders. American Institute of Certified Public Accountants (AICPA), an organization of practicing Certified Public Accountants (CPA’s) established to contribute to the effort. And the major operator Financial Accounting Standards Board (FASB), objective is to establish and improve standards of financial...
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...bepress Legal Series Year Paper Enron and the Special Purpose Entity. Use or Abuse? The Real Problem - The Real Focus Neal F. Newman Texas Wesleyan Law School This working paper is hosted by The Berkeley Electronic Press (bepress) and may not be commercially reproduced without the permission of the copyright holder. http://law.bepress.com/expresso/eps/1165 Copyright c 2006 by the author. Enron and the Special Purpose Entity. Use or Abuse? The Real Problem - The Real Focus Abstract In December of 2001, Enron Corporation filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code; one of the largest corporate bankruptcy filings at that time. When the investigations commenced and the tangled Enron web was unraveled, it was discovered that Enron had perpetrated a very sophisticated form of accounting fraud through its repeated use of what are referred to as Special Purpose Entities (“SPEs”). In their most basic forms, SPEs are business entities formed for the purpose of conducting a well specified activity such as construction of a gas pipeline, or collection of a specific group of accounts receivable. However, because of their complex nature, SPEs can be used to manipulate a corporation’s financial results, which was the primary use for which Enron employed the SPE structure. As a result, the investment and financial community has cast a dark cloud over the special purpose entity, depicting the SPE as an inherently evil structure whose only purpose is to...
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...7………………………………………………………………………………………………Current Liabilities Pg. 8………………………………………………………………………………………………Figure 4: Current Liabilities Pg. 8………………………………………………………………………………………………Contingent Liabilities Pg. 9………………………………………………………………………………………………Subsequent Events Pg. 9………………………………………………………………………………………………Long-term Liabilities Pg. 9………………………………………………………………………………………………Figure 5: Long-term Liabilities Pg.10……………………………………………………………………………………………..Figure 6: Interest Expense Pg. 10…………………………………………………………………………………………….Figure 7: Debt issuance/repayments Pg. 10…………………………………………………………………………………………….Bonds Payable Pg. 10…………………………………………………………………………………………….Effective Interest Method Pg. 11…………………………………………………………………………………………….Capital Leases Pg. 11……………………………………………………………………………………………..Figure 8: Capital Leases Pg. 13……………………………………………………………………………………………..Conclusion Pg. 14…………………………………………………………………………………………….Works Cited Introduction The Coca-Cola Company is the world’s leading owner and marketer of nonalcoholic beverage brands. In order to achieve long-term sustainable growth, they look at their brands, financial strength, unrivaled distribution system, global reach, and a strong commitment by management and associates worldwide. The company focuses...
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...Wren Co. leased a building to Brill under an operating lease for ten years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciated $12,000 per year. For year 1, Wren incurred insurance and property tax expense totaling $9,000. Wren’s net rental income for year 1 should be a. $27,500 b. $29,000 c. $35,000 d. $36,500 3. (a) Net rental income on an operating lease is equal to rental revenue less related expenses, as computed below. Rental revenue $50,000 Depreciation expense (12,000) Executory costs (9,000) Finder’s fee ($15,000 ÷10) (1,500) Net rental income $27,500 The finder’s fee ($15,000) is capitalized as a deferred charge at the inception of the lease and amortized over ten years to match the expense to the revenues it enabled the lessor to earn 11. On January 1, year 1, Mollat Co. signed a seven-year lease for equipment having a ten-year economic life. The present value of the monthly lease payments equaled 80% of the equipment’s fair value. The lease agreement provides for neither a transfer of title to Mollat nor a bargain purchase option. In its year 1 income statement Mollat should report a. Rent expense equal to the year 1 lease payments. b. Rent expense equal to the year 1 lease payments less interest expense. c. Lease amortization equal to one-tenth of the equipment’s fair value. d. Lease amortization equal to one-seventh of 80% of the equipment’s...
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