Case Assignment 1
Memorandum
To: Controller’s Group, Digger Corporation
From: Anthony Villiotti
Date: 03/06/2015
Re: Accounting treatment for right-to-use property
Background
Digger Corporation (“Digger” or “The Company”) has entered a contract with Farmer Company (“Farmer”) which grants the company the right to mine a specific parcel of land for gold for a three-year period. In addition, Digger has also been granted the non-exclusive right to use the access road which is private and currently owned and used by Farmer. Farmer has agreed to maintain the road so that it meets standard conditions of safety and functionality.
Issue(s)
1. Should Digger Corporation account for the right-to-use contract as a lease?
Analysis of Issue 1: Should Digger Corporation account for the right-to-use contact as a lease?
Digger must determine whether or not the arrangement set forth in its contact with Farmer should be classified as a lease and hence account for the transactions per guidance included in FASB Accounting Standards Codification, specifically ASC 840 – Leases. According to the Scope and Scope Exceptions section, accounting treatment for Digger’s particular arrangement with Farmer would not fall under the leases topic and thus would not be accounting for using its guidance. ASC 840-10-15-15 states:
“This Topic [Leases] does not apply to lease agreements concerning the rights to explore for or to exploit natural resources such as oil, gas, minerals, timber, precious metals, or other natural resources.”
Since the subject of the contract in question is gold, which is a precious metal, the accounting guidance that is outlined in ASC Topic 840 – Leases does not apply to Digger’s arrangement.
Conclusion
Given the scope and scope exceptions guidance found in ASC 840-10-15-15, Digger should not account for the lease in accordance with Topic 840. In other words, The Company should not treat its arrangement with Farmer as a lease for accounting purposes as the contract allows Digger the
To: Controller’s Group, Digger Corporation
From: Anthony Villiotti
Date: 03/06/2015
Re: Accounting treatment for right-to-use property
Background
Digger Corporation (“Digger” or “The Company”) has entered a contract with Farmer Company (“Farmer”) which grants the company the right to mine a specific parcel of land for gold for a three-year period. In addition, Digger has also been granted the non-exclusive right to use the access road which is private and currently owned and used by Farmer. Farmer has agreed to maintain the road so that it meets standard conditions of safety and functionality.
Issue(s)
1. Should Digger Corporation account for the right-to-use contract as a lease?
Analysis of Issue 1: Should Digger Corporation account for the right-to-use contact as a lease?
Digger must determine whether or not the arrangement set forth in its contact with Farmer should be classified as a lease and hence account for the transactions per guidance included in FASB Accounting Standards Codification, specifically ASC 840 – Leases. According to the Scope and Scope Exceptions section, accounting treatment for Digger’s particular arrangement with Farmer would not fall under the leases topic and thus would not be accounting for using its guidance. ASC 840-10-15-15 states:
“This Topic [Leases] does not apply to lease agreements concerning the rights to explore for or to exploit natural resources such as oil, gas, minerals, timber, precious metals, or other natural resources.”
Since the subject of the contract in question is gold, which is a precious metal, the accounting guidance that is outlined in ASC Topic 840 – Leases does not apply to Digger’s arrangement.
Conclusion
Given the scope and scope exceptions guidance found in ASC 840-10-15-15, Digger should not account for the lease in accordance with Topic 840. In other words, The Company should not treat its arrangement with Farmer as a lease for accounting purposes as the contract allows Digger the