Chapter 13 - Solution Manual

Singly or in combination with other assets

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singly, or in combination with other assets contributes directly or indirectly to generate future cash flows. A particular entity can obtain the benefit derived from an asset or control other’s access to it. The lease transfers rights to use the asset to the lessee who then obtains benefits derived from its use. The transaction or event giving rise to the entity’s right to or control of the asset has already occurred. That transaction is the initiation of the lease agreement. It is clear that a lease agreement has all three characteristics of an asset even when it does not meet the SFAS No. 13 criteria for capitalization as an asset.
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289 Similarly, the lease obligates the entity to make future cash payments and meets the definition of a liability. Liabilities are defined by SFAC No. 6 as probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. They embody a present duty or responsibility to one or more other entities (in this case to the lessor) that entails settlement by probable future transfer or use of assets at a specified determinable date. The lease payments are set and will entail the payment of assets (cash) to the lessor at specified amounts and dates according to the lease contract. Finally, the transaction or event (the initiation of the lease contract) obligating the entity to make the lease payments has already happened. Team 2 Argue against the capitalization of leases which do not meet the SFAS No. 13 criteria for capitalization The lease criteria found in SFAS No. 13 are intended to be used to determine whether a lease should be capitalized or not. If they do not meet at least one of the four lease criteria, the transaction does not indicate that a purchase of an asset has occurred or that a liability has been incurred. Instead the lease payments are considered a period expense. If none of the lease criteria are met, then the leased asset will revert to the lessee at the end of the lease term. Title to the asset will never have belonged to the lessee. Hence, the lessee has only temporary use, or control of the asset and does not meet the definition of an asset. Moreover, the lessee will not have acquired substantially all of the economic benefits to be derived from the leased asset because the lessee will not derive benefit for virtually all of its useful life (at least 75% thereof). Nor do the amount and timing of the lease payments imply that the lessee is essentially paying for the asset (present value of minimum lease payments at least 90%). The implication of the agreement is that the lessor owns and controls the asset, but is allowing the lessee to use the asset temporarily for a fee, or rent.
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