The Financial Accounting Standards Board

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.

(c) The term of the lease is equal to 75% or more of the estimated economic life of the leased asset.

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement

However, the article by Milano (2012) also describes how operating leases can be an efficient and flexible way of leasing to many businesses. Leasing can be an advantage to a lot of successful companies if managed accurately. The lessee has a choice in the portion of the life of the asset they lease, meaning when that contract is up they can refresh the asset with a newer version which can lead to improved performance and reliability (Milano, 2012). These advantages can be received by both financing and operating leases, although the downfall of the operating lease is that the liability of the full cost of the asset is not recorded in their balance sheet, instead only the smaller cost of the annual expense is included. This could mean that an investor or owner taking on a company may not realise the large amount of expense that occurs from leasing an asset as the total liability cannot be seen.

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,

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.

This type of lease will not affect cash flow statement dramatically. The portion of lease expenses will be included in operation cash flow and principal payment of the lease will be showed as a cash outflow from cash flow from financing activities. As a result Cash Flow from Operating activities is overstated and Cash Flow from Financing Activities is understated.

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:

Topic 842 will require the estimation of lease terms and subsequent lease payments by companies under a criteria that cautiously take into consideration, in addition to written lease arrangements, the “economic incentives for a company to exercise an option to extend a lease term or for an entity not to exercise an option to terminate a lease”. With respect to finance leases only, the lease payments will subsequently be discounted using the company’s incremental borrowing rate to reach the lease obligation. This lease obligation will then be disclosed as a liability with an offsetting disclosure of

On August 18, 2016, Norwalk, CT, —The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) meant to simplify and improve the way a not-for-profit organization category its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows (FASB, 2016).

This paper will outline the differences in accounting treatment of and criteria for determining whether leases should be accounted for as either a capital lease or an operating lease. I will be limiting my discussion to the accounting treatment of leases by the lessee. This paper will discuss the current accounting treatment for the two types of leases according to Canadian GAAP and will tie in elements of the conceptual framework to the treatment of leases from CICA handbook section 1000, followed by a discussion on accounting theories related to lease treatment, and finally current issues outlined in academic research

Dealing with Operating Leases in Valuation Aswath Damodaran Stern School of Business 44 West Fourth Street New York, NY 10012 adamodar@stern.nyu.edu

The purpose of this paper is to discuss the changes in accounting for leases according to the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). FASB published a release on May 16, 2013 proposing an improvement to the value and comparability of financial statements. The goal of the IASB and FASB was to provide a greater transparency about leverage, the assets an organization uses in its operations, and the risks to which it is exposed from entering into leasing transactions (Fasb.org, 2013).

To meet the requirement, the 2013 exposure draft is aimed to improve “the quality and comparability of financial reporting” (IFRS, 2013, p.3). IFRS (2013) illustrated that “the core principle of the proposed requirements is that an entity should recognise assets and liabilities arising from a lease” That means changes took on the existing leases requirements that there is no need to let lessees recognise lease assets and lease liabilities. Besides that, a lessee may need to report liabilities and

Under IFRS, lease classification depends on whether substantially all of the risks and rewards incidental to ownership of a