September 2, 2013
Subject: Lease Type and Lease Structure
This memo includes research on leases and lease structure. Through intensive research on the Financial Accounting Standards Board (FASB), three sub-types of leases were found for lessors to account for the leases. The three sub-types are direct financing, sales-type, and operating leases. The international accounting standards board (IASB) and FASB are proposing a draft for lease accounting. The critics are disputing some of the concerns with operating lease financial reporting. This memo will address the proposal changes for operating leases. Also included is a lease type recommendation for the client.
According to FASB ASC 840-30-05-4 (2009), lease capitalization includes direct financing and sales-type leases. These types of leases are recognizable by meeting one of the four criteria’s. A lessee under the capital lease method recognizes the lease according to FASB ASC 840-30-25-1 (2009), as an asset and as a commitment. The lessee accounts for the lease commitment in accordance to FASB ASC 840-30-30-1 (2009), at inception when the amount is equal to the present value (PV). In addition, the lease term will exclude the payment portion that represents specific cost such as insurance, maintenance, and taxes. For capital leases, a lessee recognizes lease assets and liabilities on the balance sheet (FASB, 2013).
The lessee will determine the amount to record in accordance with FASB ASC 840-30-55-6 (2009), the minimum rental payments over the lease term is the number of months of the lease times the amount of the rental fee. The lessee residual amount is added to the minimum rental expense to get the minimum lease payment.
Direct Financing Lease
The direct financing leases must meet one of the four criteria’s set by FASB ASC 840-10-25-1 (2009). First, the lease transfers possession of the property to the lessee.