Essay about Case Analysis : Lease Minimum Payment

Essay about Case Analysis : Lease Minimum Payment

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Companies use leases in order to obtain assets that would potentially cost them more to own or negative to use credit to obtain. Leasing has a reputation amongst individuals who cannot obtain the entire information of the companies use of the lease due to the accounting treatment it has. This can lead to false representations in the financial statements. With the International Accounting Board (IASB) that creates and approves financial reporting standards proposed change to the accounting methods for lease purposes, this can provide a curve to how companies record the transaction.
Leasing is a form of contract that sets an agreement for borrowing/utilizing an item or land for a specific amount of time along with payments over the duration of the contracted time. A capital lease is almost the same as an entity acquiring an asset as this leasing option has criteria’s such as allowing the lessee to buy the leased item, bargain purchase, length of the lease reaches or exceeds 75% of the economic life of the asset, and present value (PV) of the lease minimum payment is calculated to be 90% or exceeds that amount compared the fair value of the asset. With meeting at least one of the four criteria’s, the lease is known as a capitalized lease and will be recorded on the balance sheet as an asset. According to Gordon, Raedy, & Sannella (2016), “If the lease does not meet any one of the four criteria, a lessee must classify it as an operating lease” (p. 1047) as the criteria’s I have previously stated on capitalized leases. Unlike capital leases, operating leases are not required to be recorded as an asset on a company’s balance sheet as the asset does not belong to the company, and obligated to give back said asset when the contract end...

... middle of paper ... the same as itemizing smaller lease payments for the future will still exist. The new accounting rules will have an impact on income tax recorded as far as deferred tax.
Companies implementing the new lease system that heavily use the method for Type B leasing purposes will see more of an impact then those who use just Type A. The new system will require more attention to detail when it comes to recording leases and how each is categorized and the requirements to meet the standard. All Type A and Type B leases will be recorded on the balance sheet along with everything else that is required to be provided. The absence of leasing information to the public that has long been critized is now receiving a suitable answer. According to Bloomberg (2013) “It was misleading to investors and so it 's very important to get the bulk of leases on the balance sheet” (p. 1).

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