Financial and Operating Lease Transactions as Tools in Financial Risk Assessment

Since, such an agreement will be regarded as an Operating Lease and not a Capital Lease; this lease will not be reported on the company’s balance sheet. Keeping the lease off the balance sheet would make our financial ratios appear more attractive (lower debt/asset ratio) than otherwise. Hence, such a setup provides the advantage of financing the deal as an off-Balance Sheet item.

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

In 1973 the Financial Accounting Standards Board (FASB) was established to set the financial accounting standards in the United States of America for nongovernmental entities. These standards are collectively called U.S. Generally accepted Accounting Principles, or U.S. GAAP. The Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants acknowledge the authority of these standards (FASB, n.d). A “proven, independent due process” is used to collect the viewpoints of the financial statements prepares and users for the constant improvement of these standards. An Accounting Status Update(ASU) is not an authoritative source however documents the amendments to communicate the changes in the FASB Codification for a user to understand the reason and future of those changes (FASB, n.d).

We represent Thompson Laurie DiNoto, the Tenant, under that certain Residential Lease dated July 3, 2017. You are hereby notified that Mr. and Mrs. DiNoto rescinded the above-referenced Residential Lease under the terms of which they took occupancy of Lily Unit #127. This rescission is made on the ground that (1) the Premises are not in a tenantable condition; (2) the monthly rent charge of $7500 was substantially in excess of the advertised rate of $6,000 per month in violation of Business and Professions Code sections 17200 and 17500, as well as section 43(A) of The Lanham Act; (3) the Residential Lease is unlawful in that it omits required disclosures under federal and state law.

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.

A. Firms with lower effective tax rates were found to have a higher proportion of leased debt to total assets than did firms with higher effective tax rates. Some lease agreements are in-substance long-term installment purchases of assets that have been structured to gain tax or other benefits to the parties. Since leases may take different forms, it is necessary to examine the underlying nature of the original transaction to determine the appropriate method of accounting for these agreements. That is, they should be reported in a manner that describes the intent of the lessor and lessee rather than the form of the agreement.

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,

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

1. How well do the chief accountant’s assumed lease characteristics line up with the company’s past lease term experience?

The Codification’s goal is to clarify the company of thousands of U.S. authoritative accounting announcements published by diverse standard-setters. Therefore, to accomplish this objective, the FASB sponsored a project to incorporate and typically adapt all related accounting publication announced by the standard-setters of the U.S. in conjunction with those of the FASB, the Emerging Issues Task Force (EITF) and the American Institute of Certified Public Accountants

IASB. 2010, "The Conceptual Framework for Financial Reporting" IFRS, pp. A21- A38, viewed 23 April 2014,

The exposure drafts related to PPE are quite positive. Regarding the FASB exposure draft related to Topic 360, the revisions seek to provide adjustments to current accounting standards so that the differences between organizations is not so confusing to the investor. The new accounting practice is not only standard but also accountable. The ASC 360-20 provides a list with the different type of real estate transactions (Weiss, 2012). The amended list applies to situations where the entity has lost the controlling financial interest in an in-substance real estate subsidiary because of the default of a non-recourse debt (Weiss, 2012). Also, the fact that the costs associated with these changes were considered and felt to be of a small impact clarifies that this is not an adverse change in accounting standards.

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

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