Chapter 21 (Accounting for Leases)

Chapter 21 (Accounting for Leases) - Leasing Environment...

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Unformatted text preview: Leasing Environment Who are players? Advantages of leasing Conceptual nature of a lease Accounting by Lessee Accounting by Lessor Special Accounting Problems Capitalization criteria Accounting differences Capital lease method Operating method Comparison Residual values Sales-type leases Bargain purchase option Initial direct costs Current versus noncurrent Disclosure Unsolved problems Economics of leasing Classification Direct-financing method Operating method Accounting for Leases Largest group of leased equipment involves: Information technology, Transportation (trucks, aircraft, rail), Construction and Agriculture. A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, plant and equipment (PP&E) owned by the lessor for a specified period of time (SFAS # 13). A lessee acquires the right to use the PP&E and the lessor gives up the right in favor of the lessee. The Leasing Environment Three general categories: Banks; largest player in the leasing business. Captive leasing companies, whose primary operations is to perform leasing operations for their parent companies; e.g., Caterpillar Financial Services; Chrysler Financial etc. Independents; independent leasing companies. Who Are the Players? The Leasing Environment 1. 100% Financing at Fixed Rates; sometimes lease does not require down payments. 2. Protection Against Obsolescence; sometimes lease reduces the risk of obsolescence and passes the risk of residual value to the lessor. 3. Flexibility; it may contain less restrictive provisions compared to other straight debts. 4. Less Costly Financing; sometimes lessee may be able to negotiate a lower lease payment and thus, lower interests. 5. Tax Advantages; for tax purposes companies can capitalize and depreciate the leased assets leading to tax-shield benefit. 6. Off-Balance-Sheet Financing; treating lease as operating lease and thus, avoiding negative impact on debt-equity ratio. The Leasing Environment Advantages of Leasing from Lessees Perspective Capitalize a lease that transfers substantially all of the benefits and risks of property ownership to the lessee, provided the lease is noncancelable. Leases that do not transfer substantially all the benefits and risks of ownership to the lessee are operating leases. The Leasing Environment Conceptual Nature of a Lease Operating Lease Capital Lease Journal Entry: Rent expense xxx Cash xxx Journal Entry: Leased equipment xxx Lease obligation xxx The issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the benefits from the use of the property do. Statement of Financial Accounting Standard No. 13, Accounting for Leases, 1980 A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only non-cancelable leases may be capitalized)....
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This note was uploaded on 01/18/2011 for the course ACC 5115 taught by Professor Mitra during the Winter '10 term at Wayne State University.

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Chapter 21 (Accounting for Leases) - Leasing Environment...

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