The Financial Accounting Standards Board

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to: Anthony bedricky, cfo
from: wang hai
subject: comment memo on leases ed
date: January 14, 2013
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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 our opinions about some important questions regarding Proposed Accounting Standards Update – Leases (Topic 840). 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? We 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 place assets and liabilities from a leasing contract on the balance sheet of lessees, as they own the assets. 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. Do you agree that a lessee should recognize amortization of the right-of-use asset and interest on the liability to make lease payments? Why or why not? If not, what alternative model would you propose and why? We agree that a lessee should recognize amortization of the right-of-use asset and interest on the liability to make lease payments. Once the right-of-use asset and liability concept applied, a lessee would actually own the asset; therefore, the lessee should expense the leased assets and liabilities over the leasing term. In addition, expenses should include amortization of the asset and interest on the liability. Do you agree that a lessor should apply (i) the performance obligation approach if the lessor retains exposure to significant risks or benefits associated with the underlying asset during or after the expected lease term and (ii) the derecognition approach otherwise? Why or why not? If not, what alternative approach would you propose and why? We agree that a lessor should apply the performance obligation approach if the lessor retains exposure to significant risks or benefits associated with underlying asset during or after the expected lease term. Performance obligation liability represents the obligation of a lessor to permit a lessee to use the leased asset. The lessor should adjust the obligation liability and recognize the lease revenue for each period. This approach consists with the lessee’s accounting approach that amortization of the right-of-use asset and interests on the liability are recognized for each period. The cash that the lessee paid include lease expense and interest expense; the cash that the lessor received include revenue (debiting obligation liability) and interest income. Derecognation approach is an appropriate approach only depends on circumstances. If the lessor take a significant risk associated with the underlying asset, derecognation approach would not be appropriate since this approach eliminate the leased asset from balance sheet and only leave the residual value on the balance sheet. Moreover, the residual value would not guarantee to decrease leasing risks to the lessor. (b) Do you agree with the boards’ proposals for the recognition of assets, liabilities, income and expenses for the performance obligation and derecognition approaches to lessor accounting? Why or why not? If not, what alternative model would you propose and why? We agree with the boards’ proposals for the recognition of assets, liabilities, income...
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