Accounting for Leases 4

Another way to treat this provision would be not to recognize at the inception of the lease but directly expense the costs when the required maintenance is performed. Regarding the accrual method in Alternative 1, ASC 360-15-25-5 prescribes “the use of accrue-in-advance (accrual) method of accounting for planned maintenance activities is prohibited in annual and interim financial reporting periods.” This is consistent to FASB’s opinion

The reason we want to capitalise the lease commitments is that reporting under operating assets leads to substantial amounts of off-balance-sheet assets and liabilities. Hence, it is difficult to compare financial statements between two similar companies but use different accounting methods for essentially the same transaction.

To be able to classify the lease as a sales-type or direct financing lease Lambert Company must meet one or more of the following criteria:

Then thirdly, the operating lease is when the lessor depreciates the leased asset according to its depreciation policy. The maintenance costs of the leased asset are charged as an expense, the costs, such as finder’s fees and credit checks, are amortized over the lease term, and the leased equipment and accumulated depreciation are shown as equipment leased to others. Usually any lease that do not fall under the criteria for a direct financing lease or sales-type lease are recorded as an operating lease.

To classify the arrangement, ASC 840-10-25-29 states that “If at its inception a lease meets any of the four lease classification criteria in paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease.” On the contrary, if none of the criteria is meet, the lease should be classified as an operating lease (ASC 840-10-25-30)

From the above classification we can see that all the points indicate that the leases undertaken by David Jones Ltd as a Lessee are Operating Leases or Finance leases and can be determined using the steps above. Being such a big company, David Jones Ltd has both Operating and Financial leases and they are taken mainly to run the firm’s stores and warehouses. Under the annual report for the half year ended 2013 it is clearly evident that the cost of leasing activities for David Jones Ltd has increased by 4.17mn. “Payments made under operating leases, where the lease agreement includes predetermined fixed rate increases, are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease. Other operating lease payments are expensed as incurred. Lease incentives received are recognised in the Statement of Comprehensive Income as an integral part of the total lease expense and spread over the lease term.”

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,

While working on a consulting engagement, a supervisor in the team has given an assignment. The client is a regional trucking company. A new customer has approached the client with an opportunity that would require 120 trailers—20 more than the trucking company currently owns. The client is uncertain how long the relationship with the customer may last, but the deal has the potential for significant growth. The supervisor has asked a research to be conducted on leases and lease structure issues on the Financial Accounting Standards Board (FASB) website, in particular the current practice and thought related to direct financing, sales type, and operating leases. This paper is a memo addressed to the supervisor that summarizes

Wide range of entities will be impacted by the introduction of AASB 15, especially in the industry of construction, manufacturing, telecommunications and real estate (Moore Stephens Australia, 2015). While Deloitte (2016) stated that many companies may face a challenging implementation as AASB could not only impact an organisation’s financial reporting, but also may have changes to existing processes, internal controls and other business elements. For Lend lease, many impacts might be arisen on transaction as it is a construction company. The first one can be concluded that by adopting AASB 15, construction companies like Lend lease can bring revenue forward. An example of AASB 15 may result in revenue being recognised earlier than existing accounting standard is where the construction contract includes an award bonus. AASB 15 will include the bonus from the

One of the major differences between FASB and IFRS for leases standard is that IFRS uses a single model while FASB retains two models in terms of capital leases and operating leases (Katz). In this sense, U.S. companies need to account for leases in accordance with the classification of the lease. Under IFRS, all leases are treated as capital leases, and the operating leases were eliminated (IFRS). Lessees would recognize right of ROU assets and contractual obligations on the balance sheet with the present value of inevitable lease payments. Depreciation expense of ROU assets need to be separately recognized from interest expense on lease liabilities (Haywood). On the contrary, FASB upholds the division between operating and capital leases, but removes the bright line requirements. Lessees would account for capital leases as for the IASB model, and recognize a single lease expense for operating leases via a straight line approach.

There are three categories of leases, Capital, Operating, and Sale-Leaseback which are distinguished by their purpose influencing the process by which they are accounted for on the financials.

The new accounting standard IFRS 16 on leases is different in IAS 17 in many aspects. The adaption of this new IFRS will be applicable from 1st of Jan 2019. The thoroughly discussed standard has made attempt to bring the single model of accounting for Lessee the will discourage the off balance sheet financing and the on-balancing sheet reporting will be enhanced. However, on the Lessor end the accounting model has

The board acknowledges the diverse nature of regulatory framework in developing concrete and uniform standards. These standards help in proposing and clarifying a complete guidance as well as demonstrating the understanding of complex issues in accounting. Moreover, help in demonstrating advanced knowledge in the application of accounting standards in the preparation and analysis of financial statements.

According to IAS 17.20, at the beginning of the lease term, lessees shall recognise finance leases as assets and liabilities in their statements of financial position at a lower or equal amount to the fair value of the leased property and the present value of the minimum lease payments, determined at the start of the lease. The discount rate used in calculation of the present value of the minimum lease payments is the interest rate implied in the lease, if only is it feasible to determine. If it is not possible, the lessee’s incremental borrowing rate could be used. Therefore, any initial direct costs of the lessee are added to the amount recognised as an asset. Furthermore, as stated by IAS 17.25, finance lease payments should be allocated

leased asset have been transferred from the lessor to the lessee. Under EAS, the leased asset is recognized in the lessor