...Changes to Accounting Standards for Leases Who is likely to be affected? Businesses which are lessees or lessors of assets and account for lease transactions using a leasing accounting standard which changes on or after 1 January 2011. General description of the measure Current accounting standards are International Accounting Standards (IAS) and UK Generally Accepted Accounting Practice (UK GAAP). Changes to the IAS lease accounting standard are expected during 2011, and changes to UK GAAP might follow in 2013. Legislation will be introduced in Finance Bill 2011 to ensure continuity of tax treatment for lease transactions for businesses which begin to account for the transactions under new accounting standards, expected to be introduced from 2011. The measure will require tax profits and losses to continue to be calculated as if the changes to lease accounting standards had not taken place. Policy objective The measure will ensure that existing tax rules that rely on accounting classifications of leases as operating or finance leases, and the accounting treatment of lease transactions, continue to operate in the way they currently do. The objectives are to: • • ensure that lessors and lessees will be neither disadvantaged nor advantaged by the proposed accounting changes; remove uncertainty for businesses about the future tax treatment of leasing contracts, arising from uncertainty about future lease accounting standards and their interaction with current tax rules;...
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...to Client Request ACC/541 September 2, 2013 To: From: Subject: Lease Type and Lease Structure This memo includes research on leases and lease structure. Through intensive research on the Financial Accounting Standards Board (FASB), three sub-types of leases were found for lessors to account for the leases. The three sub-types are direct financing, sales-type, and operating leases. The international accounting standards board (IASB) and FASB are proposing a draft for lease accounting. The critics are disputing some of the concerns with operating lease financial reporting. This memo will address the proposal changes for operating leases. Also included is a lease type recommendation for the client. According to FASB ASC 840-30-05-4 (2009), lease capitalization includes direct financing and sales-type leases. These types of leases are recognizable by meeting one of the four criteria’s. A lessee under the capital lease method recognizes the lease according to FASB ASC 840-30-25-1 (2009), as an asset and as a commitment. The lessee accounts for the lease commitment in accordance to FASB ASC 840-30-30-1 (2009), at inception when the amount is equal to the present value (PV). In addition, the lease term will exclude the payment portion that represents specific cost such as insurance, maintenance, and taxes. For capital leases, a lessee recognizes lease assets and liabilities on the balance sheet (FASB, 2013). The lessee will determine...
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...Lease Accounting Update ( Learning objective After completing this chapter, you should be familiar with: A brief overview of the FAS B's proposed comprehensive new lease accounting guidance. I. The end is near... In May 2013, the FASB issued proposed ASU, Leases (Topic 842): a revision of the 2010 proposed Accountin-g Standards Update, Leases (Topic 840). The comment period ended in September 2013. Notice that the new lease accounting guidance is moving from FASB Accounting Standards Codification (ASC) 840, Leases, to a new Topic, ASC 842, Leases, which will supersede ASC 840. The new lease accounting guidance in ASC 842 will apply to all leases except for: Leases of intangible assets; Leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources; and Leases of biological assets, including timber. The new guidance is intended to improve the quality and comparability of financial reporting by providing 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. Under existing accounting standards, a majority of leases are not reported on a lessee's balance sheet even though the amounts involved can be substantial. In addition, lessees and lessors are required to classify their leases as either capital leases or operating leases and to account for those leases differently. For a lessee, capital lease assets and liabilities...
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... ➢ Introduction ➢ Changes in Leasing accounting ➢ Effect of the changes on the industry ➢ Conclusion A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset for a certain time. Leasing is a common activity and agreement, which appears on company’s financial statement all the time, no matter fortune 500 companies or startup firms. Most of the companies will rent tangible property including office and machines that is called rental agreement. When it comes to accounting, leasing becomes one of the most important sources of the financial statement. Since 1977, Financial Accounting Standards Board (FASB) set accounting standards to regulate leases that show on financial statement. However, current accounting rules for leases unable to meet the needs of users of financial statements because they do not provide a truthful representation of leasing transaction (Financial Accounting Standards Board). As a result, Financial Accounting Standards Board (FASB) and International Financial Reporting Standards (IFRS) decided to create joint project to redefine the accounting rules for leases (IFRS 1). Therefore, the draft of new accounting standard were made in 2010 and expected to be applied in 2013. The FASB and IFRS have proposed various changes, which should be implemented within leasing accounting. In accordance to resolutions made by the boards...
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...set of accounting practice standards has been talked about in various depths and stages along the way. There have been attempts to make international financial reporting more streamlined. This paper is intended to discuss the international financial reporting standards as they relate specifically to the United States convergence of U.S. GAAP to IFRS. The Financial Accounting Standards Board (FASB) is an organization of people who are assigned the task of developing U.S. GAAP (Generally Accepted Accounting Principles). The SEC (Securities Exchange Commission) recognizes U.S. GAAP as the rulebook for public companies in the United States to prepare financial statements. Similarly, the International Accounting Standards Board (IASB) is an organization assigned the task of developing IFRS (International Financial Reporting Standards). With the realization that there would be great benefit for the United States to develop accounting practices more accepted internationally, the IASB and FASB joined together in Norwalk, Connecticut in 2002 to discuss the common goals for international reporting. This meeting resulted in “The Norwalk Agreement” which produced a Memorandum of Understanding that says “each acknowledged their commitment to the development of high-quality compatible accounting standards that could be used for both domestic and cross-border financial reporting.” At this time, a timeline was set to start reviewing the inconsistencies in both sets of standards and start...
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...OFF-BALANCE SHEET FINANCING 1 Leases: Off-Balance Sheet Financing and the Strive for Transparency Today Brian Edman A Senior Thesis submitted in partial fulfillment of the requirements for graduation in the Honors Program Liberty University Spring 2011 OFF-BALANCE SHEET FINANCING Acceptance of Senior Honors Thesis This Senior Honors Thesis is accepted in partial fulfillment of the requirements for graduation from the Honors Program of Liberty University. 2 ______________________________ Gene R. Sullivan, Ph.D. Thesis Chair ______________________________ James B. Shelton, Ph.D. Committee Member ______________________________ Stephen R. Bowers, Ph.D. Committee Member ______________________________ James Nutter, D.A. Honors Director ______________________________ Date OFF-BALANCE SHEET FINANCING Abstract In today’s world, leases appear far and wide; they are commonplace throughout the business and accounting frontiers. Accounting for leases, however, is not so clear cut. Since there are various ways to account for leases, many companies pick and choose which they feel best suits their situation, even when this sweeps dirt under the rug along 3 the way. The financial procedures for dealing with leases should entail benefits as well as limitations to ensure each company is fairly representing all of its financial information. Off-balance sheet financing is one of the hot topics in accounting for leases because of the implications it imposes...
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...In Focus Accounting Standards Update No. 2016-02, Leases (Topic 842) On February 25, 2016, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The accounting by organizations that own the assets leased by the lessee—also known as lessor accounting— will remain largely unchanged from current Generally Accepted Accounting Principles (GAAP) (Topic 840 in the Accounting Standards Codification). “The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities,” stated FASB Chair Russell G. Golden. “It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of offbalance sheet accounting, while requiring more disclosures related to leasing transactions. “The guidance also reflects the input we received during our extensive outreach with preparers, auditors, and other practitioners, whose feedback was instrumental in helping us develop a cost-effective, operational standard,” added...
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...Death of the Operating Lease Running head: DEATH OF THE OPERATING LEASE 1 Death of the Operating Lease and its Impact on Leading U.S. Companies Mark S. Lynn Mount St. Mary’s University Copyright 2010, Mark S. Lynn Death of the Operating Lease Abstract The proposed elimination of operating lease treatment by the IASB and FASB, as outlined in 2 their discussion paper, Leases – Preliminary Views, will have a varying degree of impact on U.S firms. After a review of the evolution of lease accounting and a discussion of financial ratio analysis, this paper examines the impact of the proposed accounting change on common financial ratios of 142 large public companies. The proposal requiring the capitalization of all lease arrangements is generally detrimental to such financial measurements, with significant variability among industry sectors. Through surveys and interviews, it is further determined that while a majority of corporate financial executives do not support the proposed accounting change, they have yet to analyze the impact and prepare for the effects of the change within their own companies. Copyright 2010, Mark S. Lynn Death of the Operating Lease Death of the Operating Lease and its Impact on Leading U.S. Companies 3 “We are only tenants, and shortly the great Landlord will give us notice that our lease has expired.” ~ Joseph Jefferson (1897, p. 476). A lease is broadly defined as a contract by which an owner of property grants to another...
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...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 concerning lease treatment by the lessee. Capital and Operating Leases There are two major classifications of leases. Capital leases and operational leases. A Capital lease is defined in the CICA handbook as “a lease that, from the point of view of the lessee, transfers substantially all the benefits and risks incident to ownership of property to the lessee” (CICA, 2010, Section 3065, ¶3). In order for a lease to be classified as a capital lease, the life of the lease must exceed 75% of the life of the leased item, there must be a transfer of ownership at the end of the lease or a bargain purchase option, and the present value of the lease payments must exceed 90% of the fair market value of the asset (Grossman, A., & Grossman, S., 2010). An operational lease is described by the CICA handbook as “a lease in which the lessor does not transfer substantially...
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...Accounting Insights Accounting for leases: Change is coming. By Matthew Rodgers and Peter McElwain, Baker Tilly September 21, 2010 Leasing of equipment, real estate, and other assets has been and continues to be a significant source of financing for businesses in all industries. As a result, the financial reporting rules for the treatment of lease transactions can be significant to the financial statements and the business operations of lessees and lessors alike. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have undertaken a joint project on leases to improve the financial reporting for lease transactions. The financial reporting standards in the United States currently provide that all lease transactions will be accounted for in one of two ways depending on facts, circumstances, and to some degree the judgment of the users. The two alternative treatments, referred to as operating leases and capital leases, have dramatically different consequences on the financial statements of both lessees and lessors. There are a number of perceived weaknesses in these rules and the manner in which they are applied, which many believe result in inconsistent and incomplete reporting and presentation of an entity’s leasing activities. In response, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have undertaken a joint project on leases to improve the financial...
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...Statement of Financial Accounting Standards No. 13 FAS13 Status Page FAS13 Summary Accounting for Leases November 1976 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT 06856-5116 Copyright © 1976 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board. Page 2 Statement of Financial Accounting Standards No. 13 Accounting for Leases May 1980 CONTENTS Paragraph Numbers Introduction ................................................................................................................ 1– 4 Standards of Financial Accounting and Reporting: Definitions of Terms .................................................................................................. 5 Classification of Leases for Purposes of This Statement ........................................... 6 Criteria for Classifying Leases (Other Than Leveraged Leases).......................... 7– 9 Accounting and Reporting by Lessees .............................................................. 10– 16 Accounting and Reporting by Lessors............................................................... 17– 23 Leases Involving Real Estate.........................
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...Account Lease Abstract Accounting is accompanied by a growing economy; the economic development faster and the accounting become more important. With the rise of the global leasing industry, lease accounting has also been more and more attention. Lease accounting can be divided two parts: one is operating leases and another is finance lease. Finance lease’s ownership can transfer but the operating lease is not completely transferred that it cannot record in the balance sheet. This is seriously affecting the quantity of accounting. So, ISAB want to change the lease accounting terms, which make accounting information become reliable. This essay will describe ED242terms of lease accounting provisions of the benefits of changing. Introduction A lease accounting terms is ED242. ISAB think it not only provides complete information about 12 months later, indicated that it for the company to provide within 12 months of operating leases the assets and liabilities of information. Compare with other lease accounting terms, they only consider the intangible of the lease, and the balance sheet will not be recorded within 12 months. For the ED 242 term, it uses the method of the lessor acknowledge to underlying assets of the underlying assets under the terms of the lease contract, which is the subject of the liability under the lease contract, to confirm the use of the right of use (Vivien, 2006, P86). The result will require...
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...the new standard is aligned with IASB? The existing standard under IFRS provides some principals under which a finance lease can be recognized. The accounting method for a finance lease and for an operating lease is different. In the leases-joint project of IASB and FASB, opinions about accounting method of lessee divided under two accounting systems. FASB uses a dual approach and IFRS uses a single approach for lessee accounting. Under the single approach, a lessee will recognize all leases as “Type A” leases, which means recognize amortization of the right-of-use (ROU) asset separately from interest on the lease liability. Under IFRS, there are exemption of small-ticket leases and short-term leases for the accounting of lessee. For small-ticket leases, there is no clear benchmark about the classification of “small”. But short-term leases are leases that have leasing term of 12 months or less. Financial reports need to disclose more information weighing the cost. Considering this exemption is for the convenience of companies with insignificant leases, we design the line of 1% of total asset amount. As far as we concerned, comparing to the time limit, the proportion can reflect more precisely the impact on the company. Besides, for a small corporation, making an option for a lease whether to be finance lease or operating lease will cause a huge change of revenue of this year. In other words, we propose a new criterial for defining small assets and small-ticket leases. Therefore...
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...bedricky, cfo from: [ zhy ] subject: comment memo on leases ed date: july 8, 2013 ------------------------------------------------- The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) developed common lease accounting requirements to ensure that assets and liabilities from lease contracts are recognized in the balance sheet. August 17, 2010, the FASB issued Proposed Accounting Standards Update – Leases (Topic 840). Because leasing is an important source of finance, the board issued an Exposure Draft (ED) to ensure that this development would be with a complete and understandable picture of an entity’s leasing activities. Following are my opinions about some important questions regarding Proposed Accounting Standards Update – Leases (Topic 840). 1a. Do you agree that a lessee should recognize a right-of-use asset and a liability to make lease payments? Why or why not? If not, what alternative model would you propose and why? I agree that a lessee should recognize a right-of-use asset and a liability to make lease payments. The right-of use concept is an accounting treatment that places assets and liabilities from a leasing contract on the balance sheet of lessees. This treatment would reflect in the financial statement that leased assets and liabilities would be placed on the balance sheet. It would also suitable to most leases agreement. 1b. Do you agree that a lessee should recognize amortization...
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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 realized...
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