Essay on Business Standards For Lease Accounting Standards

Essay on Business Standards For Lease Accounting Standards

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Different type of organizations lease its assets, whether it’s private, public or non-profit. Because it’s an important activity for many organizations, lease accounting standard needs to provide users of financial statements a faithful representation of an entity’s leasing activity (FASB, Financial Accounting Standards Board). Currently, the accounting standard model requires the lessees or lessor to classify their lease as capital leases or operating leases and it should be accounted differently. This topic has always been a controversial for many people because the current accounting standards for leases allows corporations to use the off-balance sheet financing technique, which for many organizations those numbers that are not reported on the balance sheet can be substantial (IFRS, International Financial Reporting Standards). Hence, it has been a concern for many investors.
A brief overview of Accounting for Leases
Leasing has quite a history and is known to be controversial. Many believe leasing is a controversial topic because it has been criticized that the accounting model do not meet the needs of financial statement users by not providing a faithful representation about transactions relating leases (FASB, Financial Accounting Standards Board). In 1976, FASB released the Statement of Financial Accounting Standards (SFAS) No. 13 – “Accounting for leases” that allow corporations to use off-balance sheet financing. It states that the lessee is not required to recognize assets or liabilities relating to the lease on its balance sheet. Instead, it recognize it as an expense as it becomes payable.
In 2005, the US Securities and Exchange Commission (SEC) estimated that US public companies may have approximately $1.25 tr...

... middle of paper ...

...ctures of the organization for the investors and creditors. According to Hans Hoogervorst, Chairman of the IASB, stated “The most important difference is that the new Standard will provide a richer set of information for investors than is available today, which, in turn, will aid their decision making.” (IFRS).
Moreover, it will also increases the cost for many organizations. It will have a major impact on businesses who leases their assets because they’re being forced to recognize liabilities for operating lease onto their balance sheet. This will create more leverage being added to the balance sheet. Hence this will increase the organizations’ financial leverage ratios and reduces their ability to attract financing (
My opinion
Moving forward Lease accounting will continue to be more complex and difficult for organization to adopt the new standards.

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