ACC563 Assignment 5 - Week 10: Assignment #5 Week 10:...

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Week 10: Assignment #5 1 Week 10: Assignment #5 ─ If Only I Could… Strayer University Acc 563 – Advanced Accounting Theory Professor: Alfred Greenfield March 11, 2011 Week 10: Assignment #5 ─ If Only I Could…
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Week 10: Assignment #5 2 Assess the Current Accounting Practices Regarding Leases and Make a Recommendation for Improvement The financial reporting standards in the United States currently require that all lease contracts must be classified into either operating leases or capital leases. Under SFAS No. 13, if the lease meets any one of the four criteria, the lessee will classify the lease as a capital lease with the asset and liability recorded in the financial statements. Otherwise, it is classified as an operating lease. In the case of the lessor, if a lease meets any one of the preceding four criteria plus both of two additional criteria, it is classified as a sales type or direct financing lease, depending on the nature of an entity (Schroeder, Clark, & Cathey, 2011). All other leases are classified as operating leases. The two alternative treatments have dramatically different consequences on the financial statements of both lessees and lessors. Assessment of the Current Accounting for Leases There are a number of perceived weaknesses in these rules and the manner in which they are applied, which many believe result in inconsistent and incomplete reporting and presentation of an entity’s leasing activities. According to Rodgers and McElwain (2010), the criticisms of current accounting for leases are as follows. 1. The criteria used to determine if a lease transaction is capital versus operating are complex and are based on bright-line tests that are arbitrary. As such, similar transactions may be afforded substantially different treatment in financial statements, thus reducing comparability for users. 2. The existing standards provide opportunities for companies to structure leases so as to achieve a particular lease classification in order to achieve the desired financial reporting
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Week 10: Assignment #5 3 outcome. As a result, it makes it difficult for users of financial statements to properly evaluate these future cost obligations. 3. The current lease accounting model allows off-balance sheet presentation, and therefore, does not provide comparable information to financial statement users. This will impair a financial statement user’s ability to make the most informed decisions based upon those financial statements. 4. The rules which determine lease classification under SFAS No.13 may result in the same lease classified differently. That is, at the same lease, lessees can treat the lease arrangement as a capital lease, whereas lessors can classify the lease as an operating lease because the lease doesn’t meet both of two additional criteria. The lease rules should make the classification of leases the same for both lessees and lessors. Recommendations for Improvement
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ACC563 Assignment 5 - Week 10: Assignment #5 Week 10:...

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