Response To FASB Research
Response to Client Request
Frank Mattair
ACC/541
April 20, 2015
Herber Howard
To: Supervisor
From: Frank Mattair
Date: April 20, 2015
Subject: FASB Research Results and Recommendations
The Financial Accounting Standards Board (FASB) website contains accounting information and is a good source for data pertaining to any issue. Answers to the information in question to leases and lease structure issues were found on the FASB website. Research was primarily focused on three lease types, direct financing, sales type, and operating leases. The information recovered can be used by the client in the evaluation and capitalization of the new customer.
The following information listed on the FASB website should …show more content…
be used when deciding whether or not to classify a lease as an operating or capital lease the following criteria located on the FASB website must be met. SFAS No. 13, states that the criteria for classifying a lease as a capital lease are: the lease transfers ownership, the lease contains a bargain purchase option, the lease term is equal or exceeds 75 percent or more of the estimated remaining economic life, and at the beginning of the lease term the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any related investment tax credit retained by the lessor (Schroeder, Clark, & Cathey, 2011).
If none of the previously mentioned criteria is met the lease will not qualify as a capital lease and will be treated as an operating lease.
Additionally two other types of leases exist; these are known as sales type leases and direct financing leases. In order to be classified as a sales type lease or a direct financing lease the at least one of the four criteria of a capital lease must be met as well as the collectability of the minimum lease payments must be reasonably predictable and no important uncertainties surround the amount of non-reimbursable costs that have not been incurred by the lessor under the lease (Schroeder, Clark, & Cathey, 2011). A sales type lease must also have manufacturers or dealer’s profit or loss, whereas a direct financing lease will not have a manufacturer’s or dealer’s profit or loss (Schroeder, Clark & Cathey, …show more content…
2011).
Disclosures for operating leases fall under the following FASB Codifications,
For all operating leases, the lessee shall disclose rental expense for each period for which an income statement is presented, with separate amounts for minimum rentals, contingent rentals, and sublease rentals.
The rental payments under leases with terms of a month or less that were not renewed do not need to be included (FASB Codification 840-20-50-1).
The lessee is required to disclose future minimum rental payments required as of the date of the latest balance sheet presented, in the aggregate and for each of the five succeeding fiscal year and the total of minimum rentals to be received in the future under non-cancelable subleases as of the date of the latest balance sheet presented on operating leases having an initial or remaining non-cancelable lease term(s) in excess of one year (FASB Codification 840-20-50-2).
In terms of terms of revenue, net income, or assets if a lease is a significant part of the lessor’s activities the cost and carrying amount the property on lease or that is held for leasing by major classes of property by nature or function, the amount of accumulated depreciation in total, and minimum future rentals on non-cancelable leases, in the aggregate for each of the five succeeding fiscal years, total contingent rentals included in income for each period for which an income statement is presented must be disclosed in the financial statements or footnotes (FASB Codification
840-20-50-4)
It is the recommended that the client request the length of the lease terms from the new client. Then use the presented information to determine which lease option is best for the client and the customer. I am sure that the presented research will clarify any questions about leases and provides accurate data for the clients potential customers.
References
Financial Accounting Standards Board (FASB) (2015). Statement of Financial Accounting Standards No. 13. Retrieved on April 16, 2015, from www.fasb.org
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and Analysis (10th ed.). : John Wiley & Sons Inc.
Frank Mattair
ACC/541
April 20, 2015
Herber Howard
To: Supervisor
From: Frank Mattair
Date: April 20, 2015
Subject: FASB Research Results and Recommendations
The Financial Accounting Standards Board (FASB) website contains accounting information and is a good source for data pertaining to any issue. Answers to the information in question to leases and lease structure issues were found on the FASB website. Research was primarily focused on three lease types, direct financing, sales type, and operating leases. The information recovered can be used by the client in the evaluation and capitalization of the new customer.
The following information listed on the FASB website should …show more content…
be used when deciding whether or not to classify a lease as an operating or capital lease the following criteria located on the FASB website must be met. SFAS No. 13, states that the criteria for classifying a lease as a capital lease are: the lease transfers ownership, the lease contains a bargain purchase option, the lease term is equal or exceeds 75 percent or more of the estimated remaining economic life, and at the beginning of the lease term the present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any related investment tax credit retained by the lessor (Schroeder, Clark, & Cathey, 2011).
If none of the previously mentioned criteria is met the lease will not qualify as a capital lease and will be treated as an operating lease.
Additionally two other types of leases exist; these are known as sales type leases and direct financing leases. In order to be classified as a sales type lease or a direct financing lease the at least one of the four criteria of a capital lease must be met as well as the collectability of the minimum lease payments must be reasonably predictable and no important uncertainties surround the amount of non-reimbursable costs that have not been incurred by the lessor under the lease (Schroeder, Clark, & Cathey, 2011). A sales type lease must also have manufacturers or dealer’s profit or loss, whereas a direct financing lease will not have a manufacturer’s or dealer’s profit or loss (Schroeder, Clark & Cathey, …show more content…
2011).
Disclosures for operating leases fall under the following FASB Codifications,
For all operating leases, the lessee shall disclose rental expense for each period for which an income statement is presented, with separate amounts for minimum rentals, contingent rentals, and sublease rentals.
The rental payments under leases with terms of a month or less that were not renewed do not need to be included (FASB Codification 840-20-50-1).
The lessee is required to disclose future minimum rental payments required as of the date of the latest balance sheet presented, in the aggregate and for each of the five succeeding fiscal year and the total of minimum rentals to be received in the future under non-cancelable subleases as of the date of the latest balance sheet presented on operating leases having an initial or remaining non-cancelable lease term(s) in excess of one year (FASB Codification 840-20-50-2).
In terms of terms of revenue, net income, or assets if a lease is a significant part of the lessor’s activities the cost and carrying amount the property on lease or that is held for leasing by major classes of property by nature or function, the amount of accumulated depreciation in total, and minimum future rentals on non-cancelable leases, in the aggregate for each of the five succeeding fiscal years, total contingent rentals included in income for each period for which an income statement is presented must be disclosed in the financial statements or footnotes (FASB Codification
840-20-50-4)
It is the recommended that the client request the length of the lease terms from the new client. Then use the presented information to determine which lease option is best for the client and the customer. I am sure that the presented research will clarify any questions about leases and provides accurate data for the clients potential customers.
References
Financial Accounting Standards Board (FASB) (2015). Statement of Financial Accounting Standards No. 13. Retrieved on April 16, 2015, from www.fasb.org
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and Analysis (10th ed.). : John Wiley & Sons Inc.