According to the text, companies can actually acquire “property” rights by leasing assets. In a recessionary economy, purchase and lease defaults are rampant. In your opinion, what are the effects of defaulted capital leases to the lessor, lessee and economy as a whole? Should FASB consider rewriting capital lease allowances, even on a temporary basis, until the economy recovers? Give an example to support your opinion. When companies default on a capital lease, the economy is hurt as a whole. Both the lessor and lessee are hurt financially. The lessor has to cover the extra expense of the property that should be generating income. The lessor also may have to spend more to get a new operation in the building. The lessee loses financial credit and cannot go out an borrow as easily if at all. One of our contractors we were using to build got into a financial bind with one of their lessee’s a few months ago. The lessee went bankrupt and our contractor lost their main source of cash flow. We were still paying the contractor unknowingly of all the financial binds they were in, after a few months the sub-contractors started placing liens on our building for unpaid work. All in all, we had to spend money on lawyers, paid sub-contractors to avoid liens and a default on our lease.
The FASB has strict reporting requirements for leases. If a lease qualifies as an operating lease, i.e., no property rights are acquired by the lessee, why are such specific reporting guidelines used? In light of the added expenses of obtaining such expenses (appraisal, presentation and disclosure, auditing expense, etc) is it fair to require these companies to adhere to such strict reporting requirements? Give an example of how a company may benefit or not benefit by complying with these requirements. SFAS No. 13 was introduced to address how the revenue for leases should be recognized and any reporting should be done. FASB has given can only help companies with how...
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