Accounting for Leases 4
Introduction
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).
Body
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 et.al,
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).
Body
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 et.al,