Essay on Acc 400 Week 5 Assignment

Case 11-6 deals with Lessee Ltd., a company that operates in Britain and uses IFRS. The question in this case is how to classify a lease that Lessee, Ltd. acquired from Lessor Inc. The accounting standard that deals with leases under IFRS is IAS 17. IAS 17 was originally issued in September 1982 and was reissued in December 2003. It classifies leases as either finance leases or operating leases. Finance leases make it so that the lessee recognizes an asset and a liability and the lessor recognizes a receivable, basically transferring all the risks and benefits of ownership. Under operating leases, the lessor still recognizes the asset and the lessee recognizes an expense.

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement

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,

b. Any guarantee by the lessee (including by a third party related to the lessee) of the residual value at the expiration of the lease term, whether or not payment of the guarantee constitutes a purchase of the leased property. If the lessor has the right to require the lessee to purchase the property at termination of the lease for a certain or determinable amount, that amount shall be considered a lessee guarantee of the residual value. If the lessee agrees to make up any deficiency below a stated amount in the lessor 's realization of the residual value, the residual value guarantee to be included in the minimum lease payments shall be the stated amount, rather than an estimate of the deficiency to be made up.

b) If indirect method is applies, the lessor shall present changes in the right to receive lease payments separately from the changes in other operating receivables

A sales-type lease is defined in ASC 840-10-25-43(a) and states, “A lease is a sales-type lease if it gives rise to manufacturer’s or dealer’s profit (or loss) to the lessor (that is, the fair value of the leased property at lease inception is greater or less than its cost or carrying amount, if different) and meets either of the following conditions,” and the conditions it must meet are the conditions for a capital lease and the payments must be reasonably predictable and no important uncertainties about the payments should be present as stated in ASC 840-10-25-42. The conditions for classifying a capital lease are described in ASC 840-10-25-1. The journal entries would differ from the others as it would include sales revenue in the initial recording.

Further, Codification 840-10-25-42 through 3 distinguishes lease as sales type lease, direct finance lease, Leveraged lease, and operating lease. Sales type of lease is a lease which gives rise to manufacturers or dealer a profit or loss and greater fair value of a leased equipment than its carrying cost. If not, then it should meet following two criteria: (a) It involves real estate or meet criteria under paragraph ASC 840-10-25-1. (b) It does not involve real estate or meet criteria under paragraph ASC 840-10-25-1 or sub-criteria under

Topic 842 will require the estimation of lease terms and subsequent lease payments by companies under a criteria that cautiously take into consideration, in addition to written lease arrangements, the “economic incentives for a company to exercise an option to extend a lease term or for an entity not to exercise an option to terminate a lease”. With respect to finance leases only, the lease payments will subsequently be discounted using the company’s incremental borrowing rate to reach the lease obligation. This lease obligation will then be disclosed as a liability with an offsetting disclosure of the right to use asset as an intangible asset on the balance sheet. The amount of the right-to-use asset will also include any direct cost related to the negotiation of the lease and payment by the company. With respect to capital leases, the lessee is required to separate the interest on the lease liability and the amortized right-to-use assets on the statement of comprehensive income. The payment of interest on the lease liability and lease payments are recorded in the operating activities of the statement of cash flows. The principal portion of the lease payment will be recorded within the financing activities section of the statement of cash flows.

840-10-15-17   If an arrangement contains a lease and related executory costs, as well as other nonlease elements, the classification, recognition, measurement, and disclosure requirements of this Topic shall be applied by both the purchaser and the supplier to the lease element of the arrangement.

The regional trucking company should enter a sales-type lease to fulfill the requirement of 120 trailers needed for the new client. The difference between the fair value and the carrying value would be profitable for the trucking company. This will help to maintain its financial position. The risk of uncertainty in relationship with the client also can be eliminated through the sales-type lease because of the transfer of all risk and benefits to the new client.

AASB 117 provides the current rules for leases. In general terms, the lessee classifies leasing transactions under one of two categories. The current state of practice requires the

According to FASB (1976), a lease is an agreement conveying the right to use property, plant, and equipment (PPE) usually for a stated period of time. Examples of assets that can be leased include land, buildings, and plant & equipment.

In 1949 the AICPA released ARB No. 38 over the disclosure of leases on company financial statements. Before this bulletin it was not normal for the lessee to disclose the fact that the company was in a contract long-term lease of an asset. The Accounting Institute of Certified Public Accountants felt that investors and other decision making personnel should have the right to know about leases in which a company was contractually bound. The committee states in this bulletin that when it clearly evident that the lessee will have ownership of the asset after all payments are made, that the lessee should account for this in the assets and liabilities of the company’s Balance Sheet. The committee believes that the AICPA issued the opinion that all long-term leases should be disclosed in the financial statements or the footnotes. These disclosures include the payment amounts and other obligations assumed not only in the year in which they occurred but any material amounts in the life of the lease. (Committee on Accounting Procedure, American Institute of Accountants, 1949) Although, the main point of this bulletin was to address long-term leases, the AICPA never formally defines what it means by a long-term lease which can be assumed to be what modern day accounting defines as a capital lease. The purpose of the bulletin was not to address short-term leases (now called operating leases) because there was no exchange of rights in these situations.

The current FASB accounting standard for leases, based on an ownership model, is noted as one of the clearest examples of a “dysfunctional accounting standard” (Biondi, Bloomfield, Glover, Jamal, Ohlson, Penman, Tsujiyama, & Wilks, 2011). The current standard uses a rules-based approach which has led to widespread nonconformity with standard creators’ intent to have lease contracts reported on the balance sheet. There is even evidence that suggests the lessees classify their leases as operating with the sole purpose of avoiding showing them as an asset and liability on their balance sheet (Ong, 2011). The proposed changes to lease accounting would require companies to recognize assets and liabilities for most leases and has the potential to improve the quality and comparability of the financial statements. Aside from the improvement for financial statement users, this change to lease accounting will greatly impact the financial positions and financial

In the past few decades, lease accounting issue is widely discussed among different kind of enterprises. Nowadays, most investors and creditors in order to make an appropriate decision for their investment, or borrowing money to a company usually rely on the evaluation of a firm’s statement of financial position. However, in recent years, some irregularities within lease accounting have become a critical issue when evaluating the statement of financial position of a company, especially those with a large amount of operating leases. Hence, the central issue to be discussed in this essay is whether both financial lease and operating lease transactions recognized as assets and liabilities in the financial statement in IAS/AASB 117 could allow