Why was the Accountant Incorrect in Creating the Lease? Essay

Why was the Accountant Incorrect in Creating the Lease? Essay

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Subject: Case 11-6 Lessee Ltd.

It has been brought to my attention that there is some confusion among our accounting staff regarding the proper way of accounting for the three-year lease we entered into with Lessor Inc. on January 1, 2007. After examination of the information given to me by our senior and junior accountant, I have concluded that the information presented by both accounts is incorrect pursuant to the Financial Accounting Standard Board’s Accounting Standards Codification Topic 840 and the International Financial Reporting Standards’ (IFRS) IAS 17. Within this memo I have detailed the areas of concerned, so that this memo can be used as a reference going forward.
Was the junior accountant’s analysis correct? Why or why not?
Our junior accountant’s analysis of the lease being an operational lease is incorrect. The best way to determine whether the lease is operational or not, is to perform the necessary classification criteria for determining a finance lease. According to the International Accounting Standard 17.10, “situations that would normally lead to a lease being classified as a finance lease include the following: [IAS 17.10]
• The lease transfers ownership of the asset to the lessee by the end of the lease term
• The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised
• The lease term is for the major part of the economic life of the asset, even if title is not transferred
• At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value...


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...e of the minimum lease payments is 90% or more of the fair value asset, the lease cannot be deem operational. In addition to that, GAAP rules would have had the lessor calculate his present value using the implicit interest rate, while the lessee would have used the lowest rate between the incremental and implicit rate.
This is a good example of why we need to instill the importance of continued education within all our accountants- senior and junior alike. Until the accounting industry establishes a unified standard for which to go by, we need to stay abreast to all the changes under both GAAP and IFRS guidelines. It does not matter that 90% of our business is done in the U.S, because the standards here will soon merge with those of IFRS, so becoming familiar with their rules and guidelines will help our firm to transition more smoothly and stay ahead of the curve.

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