Accounting for Leases 3
stfx university | Accounting For Leases | Capital Vs. Operating Leases | | 200906027 | 11/16/2010 |
This paper will outline the differences in accounting treatment of and criteria for determining whether leases should be accounted for as either a capital lease or an operating lease. I will be limiting my discussion to the accounting treatment of leases by the lessee. This paper will discuss the current accounting treatment for the two types of leases according to Canadian GAAP and will tie in elements of the conceptual framework to the treatment of leases from CICA handbook section 1000, followed by a discussion on accounting theories related to lease treatment, and finally current issues outlined in academic research concerning lease treatment by the lessee.
There are two major classifications of leases. Capital leases and operational leases. A Capital lease is defined in the CICA handbook as “a lease that, from the point of view of the lessee, transfers substantially all the benefits and risks incident to ownership of property to the lessee” (CICA, 2010, Section 3065, ¶3). In order for a lease to be classified as a capital lease, the life of the lease must exceed 75% of the life of the leased item, there must be a transfer of ownership at the end of the lease or a bargain purchase option, and the present value of the lease payments must exceed 90% of the fair market value of the asset (Grossman, A., & Grossman, S., 2010).
An operational lease is described by the CICA handbook as “a lease in which the lessor does not transfer substantially all the benefits and risks incident to ownership of property” (CICA, 2010, Section 3065, ¶3).
It is very important for accountants to classify leases properly because the Accounting treatment differs for the two types of leases and the decision on which accounting treatment to use will affect a company’s bottom line. As stated in the CICA handbook, a capital lease should be accounted for as an asset
This paper will outline the differences in accounting treatment of and criteria for determining whether leases should be accounted for as either a capital lease or an operating lease. I will be limiting my discussion to the accounting treatment of leases by the lessee. This paper will discuss the current accounting treatment for the two types of leases according to Canadian GAAP and will tie in elements of the conceptual framework to the treatment of leases from CICA handbook section 1000, followed by a discussion on accounting theories related to lease treatment, and finally current issues outlined in academic research concerning lease treatment by the lessee.
There are two major classifications of leases. Capital leases and operational leases. A Capital lease is defined in the CICA handbook as “a lease that, from the point of view of the lessee, transfers substantially all the benefits and risks incident to ownership of property to the lessee” (CICA, 2010, Section 3065, ¶3). In order for a lease to be classified as a capital lease, the life of the lease must exceed 75% of the life of the leased item, there must be a transfer of ownership at the end of the lease or a bargain purchase option, and the present value of the lease payments must exceed 90% of the fair market value of the asset (Grossman, A., & Grossman, S., 2010).
An operational lease is described by the CICA handbook as “a lease in which the lessor does not transfer substantially all the benefits and risks incident to ownership of property” (CICA, 2010, Section 3065, ¶3).
It is very important for accountants to classify leases properly because the Accounting treatment differs for the two types of leases and the decision on which accounting treatment to use will affect a company’s bottom line. As stated in the CICA handbook, a capital lease should be accounted for as an asset
References: CICA Handbook. (2010). General Accounting Section 1000: Financial Statement Concepts, 1000.01-.58. Retrieved November 3, from Knotia.ca. CICA Handbook (2010) Dunwoody, DBO. (2009). Canadian GAAP- IFRS Comparison Series Issue 8: Leases. Retrieved November 13, from http://www.bdo.ca/library/publications/ifrs/documents/AAIssue8Leases.pdf Grossman, A., Grossman, S Pounder, B. (2009). New Views on Lease Accounting. Strategic Finance, 90(11), 16-18. Retrieved November 9, from Business Source Complete database. Scott, W. (2009). Financial Accounting Theory. Toronto: Pearson Prentice Hall. Shough, S. (2010). What The CPA 's Think About The Proposed Changes To Lease Accounting. Journal of Business & Economics Research, 8(9), 147-151. Retrieved November 9, 2010, from ABI/INFORM Global. (Document ID: 2141082471). 1..