December 20, 2010
Response to Client Request I
Research has been performed for your client to give informative information about leases and lease structures. Through this research there are three sub-types of leases from the standpoint of the lessor, which are direct financing leases, sales-type leases, and operating leases. The information found on the Financial Accounting Standards Board website pertaining to each type of lease will guide your client to making an appropriate decision regarding which type of lease will be beneficial to their company. The first sub-type lease from the standpoint of the lessor is a direct financing lease. To be classified as a direct financing lease the lease must meet one of the four following criteria set forth by SFAS No. 13: (1) the lease transfers ownership of the property to the lessee by the end of the lease term; (2) the lease contains bargain purchase options; (3) the lease term is equal to seventy-five percent or more of the estimated economic life of the leased property; (4) and the present value at the beginning of the lease term of the minimum lease payments equals or exceeds ninety percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by him. The direct financing lease must also meet both of the following criteria set forth by SFAS No. 13: (1) collectability of the minimum lease payments is reasonably predictable; (2) the lessor’s performance must be substantially complete; (3) and asset’s fair value must be equal to the lessor’s book value (http://www.fasb.org.). The direct financing lease is when no manufacturer’s or dealer’s profit (loss) is recorded. Under the direct financing method, the lessor is essentially viewed as a lending institution for revenue recognition purposes. If a lessor...