Accounting for Leases 4

Topics: Lease, Finance lease, Leasing Pages: 5 (1545 words) Published: January 11, 2012
Accounting for leases is regulated by the Financial Accounting Standards Board (FASB) in United States .Standards for accounting leases have been effective since 1977 (Accounting Standard Board, 2004). The primary standard for lease accounting is Statement of Financial Accounting Standards No. 13 (FAS 13). According to FASB (1976), a lease is an agreement conveying the right to use property, plant, and equipment (PPE) usually for a stated period of time. Examples of assets that can be leased include land, buildings, and plant & equipment.

FASB classified lease as an operating lease or a capital lease (finance lease). An operating lease is regularly for a shorter period of time and is a rental of the asset. Under an operating lease, the lessee does not identify the asset or liability related with the leased asset, it recognizes lease payments as an expense (Elena, Catalina, Stefana & Niculina, 2009). As for lessors, current accounting guidance requires that lessors recognize a lease as one of the following: sales type lease, direct financing lease, leveraged lease or operating lease. Capital leases are those leases that transfer to the lessee substantively all the risks and rewards to ownership of the leased asset (Beattie, Goodacre & Thomson, 2009). Under a capital lease, the lessee identifies in its balance sheet the leased asset and is responsible in paying rentals. The lessee depreciates the leased asset and distributes lease payments between a finance charge and a decrease of the remaining liability (KPMG, 2010).

The standard setters realized that the primary standards set previously were inappropriate and need to be change. One of the main reasons is the current lease accounting model has raised several of criticism for many years. Financial statement users have argued that some operating leases give rise to assets (the right to use the leased asset) and liabilities (the obligation to pay rentals) (Beattie, 2009). Thus, users have struggled to capitalize the asset when evaluating a company's financial statements and projecting predictions. Moreover, criticism has been made that the existing lease rules are complicated and that the bright line tests are very challenging to apply (Nobes, 2004). As such, similar transactions can be accounted in a different ways, resulting in reducing comparability for users. Additionally, arguments have been made that the current standards give opportunities for companies to structure leases and to obtain a specific lease classification (Ernest & Young, 2010). The US Securities and Exchange Commission (SEC) realised that the current lease accounting model is conceptually faulty in June 2005 Report and has been recommended that the FASB commence a project to re-evaluate the leasing standards, if possible as a joint project with the International Accounting Standards Board (IASB) (Kohlbecks and Warfield, 2005). As a result, In July 2006, there are several changes being discussed by FASB and the accountant community over lease accounting in the United States. FASB and IASB announced the commencement of a joint project to carefully re-examine lease accounting. In March 19, 2009, FASB and IASB issued a joint discussion paper on March 19, 2009 titled Leases: Preliminary Views. On 17 August 2010, IASB and FASB published a joint exposure draft ED 2010/9 Leases (Elena, Catalina, Stefana and Niculina (2009).

FASB has proposed changes to the accounting for lease arrangements that might have a significant influence on the public and private firms. The boards' stated intention is to recognize an asset and obligation for all leases, basically making all leases capital leases (Nobes, 2004). Changes also occurs because current lease accounting standards does not meet the needs of users of financial statements, where liabilities relating to operating leases are underreported, and the categorization of operating and finance leases is inconsistent and...
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