Lease Memo
Leasing Option Memo for Client
Elizabeth P Grady
ACC 541
December 5, 2011
Leslie Crews
Memorandum to: Client from: Elizabeth Grady, Staff 1 subject: Leasing options memo date: december 5, 2011
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Each year the number of leasing agreements continues to grow. There are several advantages of leasing property instead of owning. The company is protected against obsolescence and can receive 100% financing with less cost, fixed payments, and more flexibility (Schroeder, Clark, & Cathey, 2011). The new business opportunity for the client will require 20 more trucks than XYZ Trucking Inc. currently owns. The FASB issued SFAS No. 13, “Accounting for Leases” to establish standards of financial accounting and reporting for the lessees and lessors. The three leasing options to available are operating, sales-type, and direct financing. This memo will define each option, compare operating versus capitalizing and give a recommendation for XYZ Company.
Lease Definitions
A lease can be either capital or operating. It is considered to be a capitalized lease when all the benefits and risks of ownership are transferred to the lessee. To be a capitalized lease it must be noncancelable and meet one of the four following criteria in group 1. The lease must transfer ownership, include a bargain purchase option, have lease terms of at least 75% of the economic life, or present value of lease payments equal to 90% or more of the fair market value (FASB, 2011). The two additional qualities in group 2 are reasonable assurance of the collectability on payments from the lessee and the lessor’s performance is substantially complete. If none of these terms are met the lease is considered operating.
Capital Leases
A sales-type and direct financing lease are capital leases. A capital lease is an agreement in which the lessor finances the acquisition of the property for the lessee; similar to installment
Elizabeth P Grady
ACC 541
December 5, 2011
Leslie Crews
Memorandum to: Client from: Elizabeth Grady, Staff 1 subject: Leasing options memo date: december 5, 2011
-------------------------------------------------
Each year the number of leasing agreements continues to grow. There are several advantages of leasing property instead of owning. The company is protected against obsolescence and can receive 100% financing with less cost, fixed payments, and more flexibility (Schroeder, Clark, & Cathey, 2011). The new business opportunity for the client will require 20 more trucks than XYZ Trucking Inc. currently owns. The FASB issued SFAS No. 13, “Accounting for Leases” to establish standards of financial accounting and reporting for the lessees and lessors. The three leasing options to available are operating, sales-type, and direct financing. This memo will define each option, compare operating versus capitalizing and give a recommendation for XYZ Company.
Lease Definitions
A lease can be either capital or operating. It is considered to be a capitalized lease when all the benefits and risks of ownership are transferred to the lessee. To be a capitalized lease it must be noncancelable and meet one of the four following criteria in group 1. The lease must transfer ownership, include a bargain purchase option, have lease terms of at least 75% of the economic life, or present value of lease payments equal to 90% or more of the fair market value (FASB, 2011). The two additional qualities in group 2 are reasonable assurance of the collectability on payments from the lessee and the lessor’s performance is substantially complete. If none of these terms are met the lease is considered operating.
Capital Leases
A sales-type and direct financing lease are capital leases. A capital lease is an agreement in which the lessor finances the acquisition of the property for the lessee; similar to installment
References: FASB. (2011). Accounting Standards Codification. Retrieved from https://asc.fasb.org/home Ingberman, M., Ronen, J., & Sorter, G. H. (1979, Feb). How Lease Capitalization Under FASB Statement No. 13 Will Affect Financial Ratios. Financial Analysts Journal, 35(1), p 28. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate accounting (12th ed.). Hoboken, NJ: Wiley. Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and Analysis; Text readings and cases (10th Ed.). Hoboken, NJ: Wiley.