ACCG 224

After adjusting lease expense, it is important to reformulate Income Statement and Balance Sheet to reflect the effect of the adjustments to MYX’s financial statements. To transfer operating lease to financial lease, the remove of lease expense will rise NOPBT by dropping the operating expense. As the nature of asset will be consumed during its economic life, amortisation on lease asset will incur which will plus its operating expense and discount NOPBT.

C. In a sales-type lease the carrying value of the asset is charged to cost of the asset leased (expense), and the present value of the minimum lease payment as the amount of the sale. For direct financing leases no sales or expense is recognized because the asset is removed from the books. The difference between its carrying value and the undiscounted minimum lease payments is recorded as unearned interest revenue. The net investment in a sales type lease ia accounted for in a similar manner as a direct financing

It is unclear from the criteria if the purchase option established in the lease will meet the transfer of ownership criterion(a). However, ASC 840-10-25-50 details that such purchase option does not satisfy the transfer of ownership criterion, therefore, criterion (a) is not met.

● Provision 2: “Lessor may require the lessee to remove all leasehold improvements such that the premise is reinstated to original condition.”

At the lease commencement, finance leases are capitalised at the fair value of the leased property, otherwise the present value of the minimum lease payments if lower (MHI, 2014). Other short term and long term payables include the relevant rental obligations and net of finance charges (MHI, 2014). Every lease payment is apportioned between the liability and finance charges (MHI, 2014). The finance cost is indicated in the comprehensive income statement for the lease period as well as to generate a constant periodic rate of interest on the remaining balance of the liability for each period (MHI, 2014). During the lease term, the depreciation is considered for the useful life of the asset such as the property, plant and equipment assigned under finance leases (MHI, 2014). The portion of the risks and rewards of ownership are persevered by the lessor are categorized as operating leases for leases (MHI, 2014). For the period of the lease, all payments made under operating leases less any incentives from lessor are indicated in the comprehensive income statement on a straight-line basis (MHI,

c. Any payment that the lessee must make or can be required to make upon failure to renew or extend the

David Jones does not included leases as part of their intangible assets but Myer does. This shows the different ways of recording accounting record between its competitors, and managers have an incentive to determine on the choice of recording items. This reflects business operation reflecting in its underlying business reality. Therefore, manager has higher chance to manipulate the accounting

Because it is a future incurred payment and they might not know if the lease will continue after the 5 year lease, they have to:

Different operating and accounting practices misrepresent comparisons. Different firms employ operating leases to different extents, and this could distort comparisons of profitability ratios, asset turnovers, leverage levels, etc. Similarly, differing practices regarding inventory values, depreciation methods, and provisions for doubtful accounts receivable could also invalidate comparisons. For example, Garden State’s debt ratio in 1992 is almost 60 percent. However, if the firm has obtained significant amounts of equipment through the use of operating leases, or if it had factored all of its receivables, then its true debt ratio would have been substantially higher.

The lease contains an option allowing the Lessee to renew the lease for two years at the expiration of the initial 5-year term. The Lessee must pay a $100,000 termination penalty at the end of the initial

A lease other than a finance lease is an operating lease. Generally, the minimum lease payments of operating leases are recognised as an expense financial reporting.

In an attempt to fix balance sheet loopholes, FASB recently released new accounting standards involving business leases. The old standards had two types of leases, capital and operating leases. If a company used operating leases, the lease was expensed through rent expense. Future commitments of an operating lease would be reported in the footnotes of the financial statements. No asset or liability was created. Under the new standards, essentially the same two types exist, but capital leases are now called finance leases. Finance leases are accounted for the same exact way as the old capital leases. The asset and liability for the lease is recognized, and payments on the lease are allocated through amortization and interest expense. Under the new standard, operating leases now must also recognize an asset and a liability on the balance sheet (Ausburn). The new lease standard will negatively affect companies such as IBM because investors will become turned away from investing in companies that currently have large operating leases.

The accounting standard completely eliminates the difference between operating and capital lease. Lessee is supposed to record the right to use the asset and the lease payments that he has to make. Henry, E. and Holzmann, O.J., (2011) mentioned that the present value of lease payment is arrived at using the borrowing rate at which the lessee borrows or the rate the lessor

books and depreciated, and the lessee recognizes lease payments in the income statement in the period in which it is paid.

This study analyses the effect of operating lease finance on financial performance of state owned sugar firms in Kenya. The study used the retrospective research design in collection of data. A target population of all the four state owned sugar firms was considered in the study for the period 2004-2014. The firms included Muhoroni Sugar Company, Chemilil Sugar Company, Nzoia Sugar Company and Sony Sugar Company. Secondary data was the main source of data obtained from financial statements and annual reports. The data was analyzed using regression analysis and Pearson product moment correlation coefficient. The study found that operating lease finance negatively affects return on assets (ROA) (r = -.475, p = 0.008, < 0.05), as shown in Table 4.1.