The Lease Of A Lease

965 Words Feb 23rd, 2016 4 Pages
From the previous example, we learned the Type A leases aligned with capital leases, and Type B leases aligned with operating leases, with a few differences. Under Type A leases, a lessee would recognize interest expense and reduction in liability and separately amortize the right-of through depreciation. Under Type B leases, a lessee would recognize a single lease expense each year and directly credit the right-of-use asset the amount of amortization.

Advantage
From an investor 's perspective, the Proposed Standards would provide more transparency with regard to financial information disclosure. Under the current standard, operating leases are often categorized as off-balance-sheet financing. Financial statements might not be sufficient to reveal the true financial status of the company, especially for businesses heavily involved in leasing transactions such as real estate, trucks, manufacturing equipment, and constructions. However, the Proposed Standards require a comprehensive disclosure of assets and liabilities for both Type A and Type B leases. Investors in turn could obtain higher quality financial statements which better indicate leverage, operating assets, and risks of companies.

Disadvantages
First, the proposed classification provision removes the quantitative test standard, which explicitly indicates the numeric threshold such as lease term and contract value to determine the classification of lease. Instead, the new standard emphasized on the portion of the…

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