Intermediate Accounting

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15 Leases Overview For accounting purposes, there are two general categories of leases: (1) operating leases and (2) capital leases. There are subcategories within the category of capital leases that you also need to be aware of. The accounting treatment for operating leases is rather simple, and you have probably already encountered it. The lessor records lease or rent revenue and the lessee records lease or rent expense. Without the rules for capital leases, a lessee could potentially lease all of their operational assets—greatly reducing their liabilities—even if they lease the operational assets for the assets’ entire, or nearly complete, useful lives. To reduce a company’s ability to paint a different picture in their financial statements than the substance of the transactions that are generating them, certain leases must be treated as assets and liabilities to the lessee even though the assets are technically owned by the non-user of them (the lessor). Four criteria have been established to determine if a lease is a capital lease or not. If one or more of them are met, the lease must be treated as a capital lease to both the lessee and lessor. There are various kinds of capital leases. Three popular versions include financing leases, sales-type leases, and sale-leasebacks. There are many required disclosures for leases. One reason for this is a company can purposely fail to meet the four criteria on its leases, but still lease their operational assets for a majority of the assets’ useful lives in order to keep debt off the face of their balance sheet. Through a careful analysis of a company’s disclosure notes, creditors can “see through” the long-term operating leases and perhaps decide that a company is carrying too much off-balance-sheet debt to loan them new or additional funds. The subject of the accounting treatment of leases has been a hot topic and will likely continue to be so. There could be further changes to the rules so that more leases are treated as capital leases. In any event, it is important to understand the hows and whys of lease accounting in order to become a better analyst of these sometimes difficult-to- understand transactions and the ultimate effects the differing treatments have on the financial statements.
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15-2 Chapter 15 Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered. If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the
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032459237X_176354 - 15 Leases Overview For accounting...

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