ACC306 - Intermediate Accounting II
According to our text, regardless of the legal form of the agreement, a lease is accounted for as either a rental agreement or a purchase/sale accompanied by debt financing depending on the leasing arrangement. However, I firmly believe that because of the professional judgment that is needed to differentiate between leases, it is still very easy to misrepresent the truth on a firm’s balance sheet.
When accounting for leases, an operating lease records no asset or liability on the financial statements and the amount paid is expensed as it is incurred. On the other hand, a capital lease is recorded as both an asset and a liability on the financial statements and…show more content… All of these reasons relate to the desire to give the appearance that the economic performance of the firm is stronger than it really is and that capital structure risk is lower (Frecka, 2008).
Therefore, the FASB is attempting to change the way leases are accounted for:
NORWALK, Conn.- The Financial Accounting Standards Board Sept. 16 tentatively agreed to reconfirm its plan to propose the right-of-use model, a principles-based approach in accounting for leases, but said its views could be influenced later by different issues that arise during continuing discussions.
The discussion was part of FASB 's nondecisionmaking review of an analysis of comments received on the discussion paper, Leases: Preliminary Views. The discussion paper was issued jointly with the International Accounting Standards Board in March with a comment period ending July 17 (5 APPR 303, 4/3/09).
For lessee accounting, it proposed to require lessees to recognize on the statement of financial position a "right-of-use asset," and a liability for an obligation to pay rentals for all leases.
The right-of-use model is favored among users of financial statements who believe it would eliminate existing structuring opportunities and would result in accounting for lease arrangements based on the substance rather than the form of the transaction. (Lugo, 2009).