Sable Inc. Case Study

The third and final question from the case is how would the lease classification change under U.S. GAAP. The FASB codification that deals with leases is ASC 840. U.S. GAAP classifies leases as operating leases or capital leases and it has a section for sale-leaseback transactions as well. Under U.S. GAAP, the lease in this case would be classified as a capital lease. This is because ASC 840-10-25-29 says, “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.” This lease meets two of those criterions. The lease term is equal to 75% of the economic life of the equipment (3 year lease term / 4 year economic life of equipment = .75 or 75%) and the present value of the minimum lease payments “equals or exceeds 90 percent of the excess of the fair value of the lease property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor” (ASC 840-10-25-1d). The present value of the minimum lease payments does in fact equal or exceed 90 percent of the fair value of the equipment ($248,690 / $265,000 = .94 or 94%). Under ASC 840-10-25-31, the lessee should use the implicit rate to calculate the present value of the lease payments because the lessee already

* At commencement of the lease term, finance leases should be recorded as an asset and a liability at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable, or else at the entity's incremental borrowing rate) [IAS 17.20]

The US accounting standards under Financial Accounting Standard 13 classified leases into Capital and Operating Leases. While Capital Leases transferred the lessee substantially all the risks and rewards incidental to ownership of the leases asset, it had to follow the criterion:

The operating leases in general provide financing and maintenance. The lease contract is written for a time much shorter than the projected useful life of the leased asset. However, the lessor expects to regain all cost eventually either by lease renewal payments or by sale of the equipment. Operating leases is a necessity under the lease contract and are not sufficient for the lessor to retrieve the full cost of the equipment. The operating leases frequently contain a cancellation clause which is the last feature.

Recognition and measurement of leases is an important part of accounting for leasing. Many companies and organizations rely on leasing as a means of acquiring assets without actually owning the asset. Companies often lease land and buildings, company vehicles like trucks for construction, and equipment for manufacturing or a business; like computers, copiers, and printers. Leasing allows for companies to stay in the game when it comes to new technology, so that when new technology comes out, companies will be able to start a new lease with new equipment. While leasing is a popular way of acquiring assets, it’s possible that companies and organization will pay more money for a lease then if the asset had been purchased. Leasing of

First let’s start by describing the basic concept of a lease. Some leases are merely rentals, whereas others are effectively purchases. FASB classifieds

The present value of the minimum lease payments is substantially all of the fair value of the leased asset at the inception of the lease.

Existing lease accounting standards require lessees to classify their lease contracts as either finance or operating leases. If a lease is classified as a finance lease, assets (and liabilities) are recognized in its statement of financial position. For an operating lease, the lessee simply recognizes lease payments as an expense over the lease term. This split into finance and operating leases has given rise to a number of problems.

19. None of the resources used by the business are subject to leases. Financial/operating leases would be an expense shown on the statement of comprehensive income and there is no such line item represented. The difference between a finance and operating lease is that a finance lease agreement is one in which all the risks and rewards of the asset are transferred to the person leasing the asset. With an operating lease, the risks and rewards of the asset are not transferred to the person leasing it.

A lease agreement may be a real agreement between An proprietor," Also a customer or "renter," to use for a few preference. Those practically broadly perceived leases are to land, for distinctive alternately benefits of the business utilize; to cars, benefits of the business alternately individual; Furthermore equipment or machines, consistently to business. There are various plan B — proceeding for leases with no settled close, to a predefined term, for an elective will buy — Also evolving sorts of rate alterations. There similarly would remarkable agreement for sub-rents alternately authorizing to ensured advancement such as music or pc.

A lease in this context is a legal document or contract between a landowner who is the lessor and a company (or individual) who is the lessee that grants the lessee rights to exploration and development rights to potential subsurface mineral commodities. Today there is no standard oil and gas lease form. At one point the “Producers 88” form was considered the standard form but today various oil and gas companies utilized several different types of lease forms as their starting point for negotiations. Generally their are two broad types of oil and gas lease forms based on the timing of the lease bonus payments. The most commonly used type is the “Pay-Up” lease which no bonus payments are due after the signing of the lease, instead the lessor gets one hundred percent of the lease bonus money combined with annual rental payments up front. The other type is the “Rental Lease” that is not as commonly used in which the lease, can lapse if the rentals are not paid in a timely manner by the company which would ultimately result in the termination of

We can distinguish leases either financial or operational. In existing lease accounting practices, we treat financial leases similar to purchase with cash or on account. On the other hand operational leases do not recognised as an asset in the books of the business but we do deduct lease payments as an expense and it showed up in the income statement. Over the time, the use of operating income increased so much that the academician, regulators and practitioners raised concerns to potential opportunistic use of it by businesses (Altamuro, Johnston, Pandit and Zhang, 2014). In general companies who use operating lease ends up with improved return on assets and debt to equity ratio and therefore better solidity comparing to the companies who do not use operating leases, instead they use

These leases are classified under which the company assumes substantially all of its risks and rewards of ownership. [IFRS 2016 Project Summary, P 3] On Recognition, assets held under Financial Lease are measured at amounts equal to the lower of their fair value and the present value of the minimum lease payments since the commencement of the lease, a corresponding liability is also established. After initial recognition the asset is accounted in accordance with respective accounting

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