Leases Are A Contractual Agreement

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.

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

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.

ASC 840-10-25-1 presents the criteria the Lessee will consider as part of classifying the lease. Each criterion will be analyzed separately to determine if it meets the classification as a capital lease. ASC 840-10-25-1a states:

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,

Although many variations of lease financing are available, potential lessees should be familiar with two general types of leases: the full payout lease and the fair market value (FMV) lease. The choice of lease is based upon the lessees’ long-term plans for the asset involved. A full payout lease is one in which the present value of the payment stream equals the acquisition cost of the asset. Options at the end of the lease typically include return, renewal, or purchase often for $1. The lessee is able to deploy and utilize the equipment, while the periodic payments of the full payout lease ease the financial burden of making a large IT acquisition. This option is a good choice when future ownership is desired, the dollar value of the equipment is substantial, the expected productive life of the assets is longer than five years, and the flexibility of spreading out payments would

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

As per your request of an analysis of the following topics: Adjusting lower of cost or market inventory on valuation, Capitalizing interest on building construction, Recording gain or loss on asset disposal, and Adjusting goodwill for impairment. The Financial Accounting Standards Board (FASB) established clear guidelines addressing the items mentioned above. I will outline that FASB generally accepted accounting standards (GAAP) affect each area, and how these improvements to the company will benefit the company’s financial health (FASB, 2010).

List the arguments you would use to persuade the Judge to rule in your favor.

The biggest notable difference is the handling of each on the financial statements. An operating lease is similar to a rental agreement so there is no long-term liability on the balance sheet. It allows the lessee to engage in off-balance sheet financing. This provides several benefits for the company to maintain a good financial position. When a company enters a capital lease the asset is reported on the balance sheet. This results in the debt to total equity increasing and the rate of return on total assets to decrease. The ratios can negatively affect financing opportunities, the corporate bond covenants, and management compensation incentives (Schroeder, Clark, & Cathey, 2011). In addition, the depreciation required on the asset in a capital lease will result in a deferred tax. The funds from operations on the cash flow statement will be higher by the deferred tax when a capital lease is used (Ingberman, Ronen, & Sorter, 1979). The cash from the operations section on the cash flow must be reconciled to remove noncash items during the period (Kieso, Weygandt, & Warfield, 2007). The company will receive benefits from both types of leases; the right option for the company will depend on their needs and strategy.

The most significant influence of IFRS 16/AASB 16 changes on statement of financial position might be increasing in asset and liability. As a result of the leases are classified into short-term and long-term leases instead to finance lease and operating lease under IAS 17, and all leases except short-term leases and leases of low-value assets will be recognized as lease assets and liability. In addition, the carrying amount of lease assets will decrease more rapidly than the carrying amount of lease liabilities. Thus it may lead to a decreasing in owner’s equity compared to IAS 17 requires companies with material off balance sheet

Under current U.S. Generally Accepted Accounting Principles (GAAP), an organization applies a classification test to determine the accounting for the lease arrangement. Two ways of accounting for leases are capital

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