...21, 2011 Subject: FASB Lease Practices and Client Recommendation I have researched and analyzed the different Financial Accounting Standards Board (FASB) practices related to lease options, which our trucking client may want to consider in his or her new business opportunity. Leases are a way in which companies can finance a business project. According to the official FASB website, a lessor may record a lease transaction as a sales type lease, a direct financing lease, or an operating lease. A sales type lease and a direct financing lease are different ways to record a capital lease (Standards, 1976). One lease option the trucking client has is to record the leases as direct financing leases. Direct financing leases are recorded when the carrying value of the lease is equal to the fair value of the leased property at inception (Standards, 1976). This lease arrangement is a sales and financing transaction. When a direct financing lease is recorded, only the interest received is recognized on the lessors books as income. The cash outflow is equal to the carrying value of the asset, and the cash inflow is equal to the lease payments (CFA, 2011). Another lease option the trucking client has is to record the leases as sales type leases. A sales type lease is similar to a direct financing lease, except upon inception of the lease; profit on a sale is recognized. The profit recorded at the beginning of the lease term is the present value of the lease payments, less the cost...
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...Capital Leases | Overview According to FASB ASC 840 (n.d.) (IAS 17), a capital lease exists if one of four conditions is met: the transfer of title of the asset to the lessee, the lease includes a bargain purchase option, the lease period is equal to or greater than 75% of the estimated economic life of the asset, or the present value of the minimum lease payments is 90% or more of the fair value of the asset less investment tax credit held by the lessor. Capital Leases | Requirements of the Lessee The lessee should report the asset and liability on the balance sheet or in footnotes at the present value of the minimum lease payments at the beginning of the lease unless the fair value of the leased asset at lease inception is lower (FASB ASC 840, n.d.). Disclosure requirements in the balance sheet or footnotes include the gross amount of assets recorded under capital leases, future minimum lease payments, and total of minimum sublease rentals (FASB ASC 840, n.d.). The income statement presentation must include the total contingent rentals (FASB ASC 840, n.d.). Capital Leases | Requirements of the Lessor Lease agreements, in general, require systematic payments from the lessee to the lessor. Depending on the recognition of the lessor’s income, historically in relation to lease agreements, the lessor had an option to either follow the accounting matching principle and pair lease payments with the applicable operating cost in any given period or chose...
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...Benefits of a Capital Lease December 3, 2012 MEMORANDUM TO: Trucking Company, Inc. FROM: Accountant DATE: December 3rd, 2012 SUBJECT: Benefits of a Capital Lease CC: John Smith, Supervisor In response to your request for more information on the topic of leases, I will explain the different aspects of leases to help you get a better understanding of the topic so that you may make an informed decision on which type of lease is best for your company. Capital Leases A capital lease emulates an installment purchase of an asset. This type of lease transfers the benefits and risks associated with ownership of an asset to the lessee (Schroeder, Clark, & Cathey, 2011). According to ASC 840-10-25 (FASB, 2009) (IAS 17), a lease must meet at least one of the following four criteria to be considered a capital lease: a. Ownership is transferred by the end of the lease agreement. b. There is a chance to purchase at a bargain price. c. The length of the lease is 75% or more of the assets life. d. The sum of the minimum payments, calculated at present value, exceed 90% of the assets fair value. Criteria c and d do not apply if the term of the lease begins in the final 25% of the assets useful life. Two Types of Capital Leases There are two types of capital leases concerning the lessor; direct financing and sales-type leases. For a capital lease to be considered a direct financing or sales-type lease, according to ASC 840-10-25 (FASB, 2009), both of the following...
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...Edward Logie Accounting 304_01 10/28/2015 Writing Assignment 5 New Lease Accounting Standard On October 7 the FASB held it last decision meeting on their new lease accounting convergence project. The project is a joint project between the FASB and the IASB to change how leases would be recognized. Before leases may or may not have to be recognized on the lessee’s books. The new rule would require lessee to recognize the assets no matter what. The FASB originally was looking to implement the new standard by the end of 2015, but that will not happen. The transition will most likely take place somewhere in 2019. In the article “Lease Accounting Standard New Start Date Likely 2019” they talk about the difficulties faced by companies with this change. The first being that this change comes right along with the changes in revenue recognition, making this a balancing act become for companies to update to the new standards. Second most companies are not ready to take on this change. As stated in the article “Last year Deloitte found that almost 80% of the executives it surveyed were not ready for the standard, citing the quality of data, the complexity of compliance, and a lack of confidence in IT systems as the main concerns for companies.” The reason why I picked this article is because in class we most of the time take about the reasoning and methods and accounting entries that happen with transactions and how changes in practice affect how we recognize these transactions...
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...Subject: FASB Research Results and Recommendations The Financial Accounting Standards Board (FASB) website offers information on many accounting subjects. Per your request I have researched the FASB website for information on leases and lease structure issues, in particular the current practices and thought related to direct financing, sales type, and operating leases. The following is a brief explanation of the results and also a recommendation of an approach that the client can use to evaluate and capitalize on the opportunity of adding the new customer. The FASB has outlined certain criteria for classifying leases as either capital leases or operating leases. In SFAS No. 13 the criteria for classifying a lease as a capital lease are; the lease transfers ownership, the lease contains a bargain purchase option, the lease term is equal to 75 percent or more of the estimated remaining economic life, and at the beginning of the lease term the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any related investment tax credit retained by the lessor (Schroeder, Clark, & Cathey, 2011). The lease only has to meet one of those criteria to be a capital lease. If none of these criteria are met then the lease is classified as an operating lease. Leases can also be classified as a sales type lease or a direct financing lease. For a lease to be classified as a sales type or direct financing lease the lease would have...
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...In the news recently, there has been a lot of discussion between the Financial Accounting Standards Board(FASB) and the International Accounting Standards Board(IASB) on finding an agreement to bring together US GAAP and IFRS on the topic of lease accounting. As we learned in class, one of the main differences between US GAAP and IFRS is the recognition of the expense pertaining to the lease. This is still one of the major sticking points in the discussions because it can affect the balance sheet so much. The main reason why the two parties are coming together to see if they can reach an agreement on this topic is to be able to create greater transparency for lease accounting worldwide to help investors globally. As we have studied so far this semester, US GAAP is very detail oriented when it comes to classifications which can make for a much more complicated situation, but does more accurately represent what is actually going on. IFRS is a little more judgment based which allows for companies to account for similar stuff in different ways. This is why it is understandable that coming together to a compromise is so difficult for these two parties. The members of the FASB want to continue with the approach that leases should be classified based on asset type where as the majority of the members of the IASB want to do away with classification of leases and treat all leases like a financed acquisition of an asset. It is hard to say which side will budge on the issue, but according...
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...Date: | November 30, 2015 | Re: | FASB research results | | | As you requested, I have completed the research on the lease types and lease structure issues on the Financial Accounting Standards Board (FASB) website for the Lone Star Trucking Company. I did specific research on direct financing, sales type, and operating leases. After going over the information I have, I will provide you my recommendation for handling the client’s situation According to the FASB, both the client and the client’s potential new customer need to determine if their arrangement will meet one or more of these four criteria: 1. Transfer of ownership – the potential lease will transfer ownership of the property to the lessee at the end of the designated lease term (fasb.org). The client will have met this criterion if the lease agreement provides for the transfer of title at or shortly after the end of the lease term. Usually, there is a nominal fee that is required by statutory regulation to transfer title. 2. Bargain purchase option – the potential lease will contain a bargain purchase option, where the lessee will have the option to purchase the asset for a percentage less than the fair market value (fasb.org). 3. Lease term - the potential lease term is equal to 75 percent or more of the estimated economic life of the lease property (fasb.org). 4. Minimum lease payments - the present value at the beginning of the lease term of the minimum lease payments, excluding any portion of...
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...acccounting project. Introduction ASC 840, Leases and FASB Statement No. 13, Accounting for Leases covers the standards of financial accounting and reporting for leases by lessee and lessor. A lease is a contract in which the lessor gives the lessee the right to use an asset (property, plant and equipment) for a specified period of time in exchange for periodic rental payments. The lessor is the owner of the property and the lessee is a tenant or renter. Most frequent examples of assets acquired by lease include automobiles, building space, computers and equipment. NeedsSpace entered into a lease agreement with WeHaveIt to rent space for its corporate offices. The lease is classified as an Operating Lease in accordance with ASC 840, Leases and FASB Statement No. 13, Accounting for Leases. What is an Operating Lease? An Operating Lease is when the lessor gives the lessee the right to use leased property for a limited period of time but retain all the risks and the rewards of ownership. The lease also has a 10 year lease term and there is no option to renew nor is the ability to negotiate for the renewal provided in the lease agreement. Lease term defined in FASB 13 states: “The fixed non-cancelable term of the lease plus all periods, if any, covered by bargain renewal options, all periods, if any, for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured, all periods, if...
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...IntroductionASC 840, Leases and FASB Statement No. 13, Accounting for Leases covers the standards of financial accounting and reporting for leases by lessee and lessor. A lease is a contract in which the lessor gives the lessee the right to use an asset (property, plant and equipment) for a specified period of time in exchange for periodic rental payments. The lessor is the owner of the property and the lessee is a tenant or renter. Most frequent examples of assets acquired by lease include automobiles, building space, computers and equipment.NeedsSpace entered into a lease agreement with WeHaveIt to rent space for its corporate offices. The lease is classified as an Operating Lease in accordance with ASC 840, Leases and FASB Statement No. 13, Accounting for Leases. What is an Operating Lease? An Operating Lease is when the lessor gives the lessee the right to use leased property for a limited period of time but retain all the risks and the rewards of ownership. The lease also has a 10 year lease term and there is no option to renew nor is the ability to negotiate for the renewal provided in the lease agreement. Lease term defined in FASB 13 states:“The fixed non-cancelable term of the lease plus all periods, if any, covered by bargainrenewal options, all periods, if any, for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured, all periods, if any, covered by ordinary renewal...
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...IASB Agenda ref FASB Agenda ref 3G 274 STAFF PAPER REG FASB│IASB Meeting Project Paper topic CONTACT(S) March 2014 Leases Lease Term Anna Heining Sarah Geisman Scott A. Muir aheining@ifrs.org sgeisman@ifrs.org samuir@fasb.org +44 (0)20 7246 6428 +44 (0)20 7246 6464 +1 (203) 956 3478 This paper has been prepared by the staff of the IFRS Foundation and the FASB for discussion at a public meeting of the FASB or IASB. It does not purport to represent the views of any individual members of either board. Comments on the application of US GAAP or IFRSs do not purport to set out acceptable or unacceptable application of U.S. GAAP or IFRSs. The FASB and the IASB report their decisions made at public meetings in FASB Action Alert or in IASB Update. Objective 1. The purpose of this paper is to discuss the accounting for options to extend or to terminate a lease, both at lease commencement and during the lease term. This paper also discusses the accounting for purchase options. 2. This paper is structured as follows: (a) (b) (c) Summary of the proposals in the 2013 Leases Exposure Draft (“2013 ED”) Summary of feedback Staff analysis and staff recommendations (i) (ii) (iii) (iv) (d) (e) Extension and termination options – initial recognition Extension and termination options – reassessment Purchase options Symmetry between lessee and lessor accounting for options Appendix A – The proposals in the 2013 ED Appendix B – Existing guidance on lease term in IAS 17 and Topic...
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...Group In Re: Leases and Lease Structures A company wants information about leases and lease structures in the FASB codification required by the supervisor in response to the request of the client. The client is a regional trucking company. The company owns one hundred trailers 20 less than the requirement to take a new job proposal. The opportunity offers new growth, the doubt about the duration of the work is unclear and the client needs advice about whether to buy or lease the extra trailers needed to complete the job. The paper will give the outcome of the research completed on the lease and lease structures in the FASB codification required by the supervisor in response to the request of a client. The codifications of the Financial Accounting Standards Boards give substance to different lease structures and the terms and conditions for lease transactions. The statement of financial accounting standards (SFAS) speaks of different lease structures. SFAS Number 13 discusses the categorization of various principles about lease structures to capital leases and operating leases. The capital leases are leases in which the benefits and the risks pass to the lessee. “A lease is considered a sales type lease when the manufacturer or dealer’s profit or loss implies that the leased item is considered inventory and the seller or the lessor is earning a profit on the sale”. (Schroeder, Clark & Cathey, p.439, 2010) In an instance with a sales type lease, the fair value...
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...done the required research on the Financial Accounting Standards Board (FASB) website regarding lease structures and current practices as it would relate to the specific issue at hand with ABC Trucking. All my research has shown that leasing would be an optimum option for the company to consider when leasing the extra trucks according to the requirement of the new potential client. Some of the benefits of leasing are that they will be able to finance all of the cost of the additional trucks without having to use of their own cash, they will be able to keep the trucks off their balance sheet if they choose an operating lease, and a lease will protect them when the trucks will became old and obsolete. Basically, there are two types of leases that ABC Trucking can choose from, below is a brief description and requirements of each: 1. Capital Lease: this is when the agreement for the lease is designed for the lessee acquires the assets and the end of the lease. From ABC Trucking’s perspective, they will be entering into a capital lease if it meets any one of the following four conditions as in paragraph 840-10-25-1 of the FASB Codification: (1) At the end of the lease, the lessee becomes the owner of the asset (2) The lease give lessee an choice to purchase the asset for a price that is cheaper than the fair value as dictated by the market forces of the asset (3) The duration of the lease is for a time period which is 75 percent or greater of the estimate time...
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...FASB Statement No. 13: Accounting for Leases Asim Yunus ACC 632 – Critique of Accounting Theory Professor Lynch October 16, 2012 FASB Statement 13: Accounting for Leases FASB Statement 13, Accounting for Leases, was established by the FASB and made effective starting January 1st, 1977. As early as 1949, leasing was recognized as an important financial tool by the accounting business when the American Institute of Certified Public Accountants (AICPA) issued Accounting Research Bulletin No. 38, “Disclosure of Long-Term Leases in the Financial Statements of Lessees.” In the 1960s, the APB recognized how important accounting for leases was when they included it in the top five topics that were to be studied by the AICPA’s Accounting Research Division. In 1962, the Accounting Research Study No. 4, “Reporting of Leases in Financial Statements”, was released and eventually APB picked up the subject. For the next ten years, the APB released four opinions (No. 5, 7, 27 & 31) concerning leases which were improved by three AICPA Accounting Interpretations. Even though progress was made when it came to the topic of Accounting for Leases, certain questions remained. The SEC helped out on the topic as well by issuing three pronouncements concerning leases (Accounting Series Releases No. 132, 141 & 147) on October 5, 1973. Like APB Opinion No. 31, Accounting Research Series No. 147 only dealt with disclosure. There were still many holes in the lease accounting practice. The FASB...
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...included in minimum lease payments. According to FASB ASC paragraph 840-10-25-5, “minimum lease payments comprise the payments that the lessee is obligated to make or can be required to make in connection with the leased property”. Annual rent of $1 million is the stipulated payments that the lessee is obligated to make, so that it should be included in minimum lease payments. In regard to the probable increased rental fees (due to increase in CPI), we consider it not to be included in minimum lease payments. Firstly, we find FASB ASC paragraph 840-10-25-4 states that lease payments depending on an existing consumer price index shall be included in minimum lease payments, whereas any increases or decreases in lease payments resulting from subsequent variation in the index are classified as contingent rentals. Secondly, it is clearly written in FASB ASC paragraph 840-10-25-5 that, for lessee, contingent rentals should be excluded from minimum lease payments. Thirdly, we also find that, in FASB ASC paragraph 840-10-25-7, minimum lease payments, for lessor, include the payments described in paragraph 840-10-25-5. Thus, the subsequent change of CPI is contingent rentals and should be excluded from minimum lease payments for both lessee and lessor. Summary In conclusion, the $500,000 external legal counseling fee and $1 million legal fee, the penalty payment if default declares, and the $1 million stipulated rental fee should be included in minimum lease payments, whereas the...
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...financial reporting system has become popular for its use globally. In the text Intermediate Accounting by C.P.A Kieso, GAAP also known as generally accepted accounting principles are standardized guidelines and procedures to financial accounting and reporting. There are three major parties that are involved in the standard setting where U.S companies must abide by. Securities and Exchange (SEC), established by the federal government to help create and regulate financial information presented to stockholders. American Institute of Certified Public Accountants (AICPA), an organization of practicing Certified Public Accountants (CPA’s) established to contribute to the effort. And the major operator Financial Accounting Standards Board (FASB), objective is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, which includes issuers, auditors, and use of financial information. Transpired by the London-based International Accounting Standards Boards (ISAB); for international purposes U.S GAAP or (IFRS) International Reporting Standards, also known as IGAAP are two rules accepted for financial reporting. Requirements for IFRS;...
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