Response to Client Request
Running head: RESPONSE TO CLIENT REQUEST
RESPONSE TO CLIENT REQUEST
ABRAHAM P. THOMAS
UNIVERSITY OF PHOENIX
RESPONSE TO CLIENT REQUEST This paper reflects the results of the research done on the lease and lease structures in the FASB codification as required by the supervisor in response to the request of a client. The client is a regional trucking company and currently owns 100 trailers which is 20 less than what is required to take up a new job that has been offered to the company. Though the new opportunity promise growth, the uncertainty on the duration of the work is confusing and the client needs advice whether to buy or lease the extra trailers required to finish the job. The FASB codification throws light in to the different lease structures and the terms and conditions for lease transactions. The statement of financial accounting standards (SFAS) mentions about different lease structures. SFAS No. 13 has specified certain criteria by which lease structures are classified in to capital leases and operating leases. The capital leases are the kinds in which the benefits and the risks are transferred to the lessee. The capital leases are further classified in to sales type leases and direct financing leases. According to Schroeder, Clark & Cathey, a lease is considered as a sales type lease when there is a manufacturer’s or dealer’s profit or loss which implies that the leased item is considered as an item of inventory and the seller or the lessor is earning a profit on that item (Schroeder, Clark & Cathey, 2005, p. 426). In case of a sales type lease, the fair value and the carrying value of the property would be different. The risks and benefits in a sales type lease flows on to the lessee. A direct financing lease is the one in which the profit of the dealer or lessor is not recorded. As per the FASB codification, the recording of the total minimum lease payments are to be recorded as a receivable on the date of the
RESPONSE TO CLIENT REQUEST
ABRAHAM P. THOMAS
UNIVERSITY OF PHOENIX
RESPONSE TO CLIENT REQUEST This paper reflects the results of the research done on the lease and lease structures in the FASB codification as required by the supervisor in response to the request of a client. The client is a regional trucking company and currently owns 100 trailers which is 20 less than what is required to take up a new job that has been offered to the company. Though the new opportunity promise growth, the uncertainty on the duration of the work is confusing and the client needs advice whether to buy or lease the extra trailers required to finish the job. The FASB codification throws light in to the different lease structures and the terms and conditions for lease transactions. The statement of financial accounting standards (SFAS) mentions about different lease structures. SFAS No. 13 has specified certain criteria by which lease structures are classified in to capital leases and operating leases. The capital leases are the kinds in which the benefits and the risks are transferred to the lessee. The capital leases are further classified in to sales type leases and direct financing leases. According to Schroeder, Clark & Cathey, a lease is considered as a sales type lease when there is a manufacturer’s or dealer’s profit or loss which implies that the leased item is considered as an item of inventory and the seller or the lessor is earning a profit on that item (Schroeder, Clark & Cathey, 2005, p. 426). In case of a sales type lease, the fair value and the carrying value of the property would be different. The risks and benefits in a sales type lease flows on to the lessee. A direct financing lease is the one in which the profit of the dealer or lessor is not recorded. As per the FASB codification, the recording of the total minimum lease payments are to be recorded as a receivable on the date of the