Unit Lease Research-FASB
Unit Lease Research - FASB
Steve J
Accounting Theory and Research ACC/541
March 10, 2000
Professor Cecil L
Regarding the potential new investing opportunities with your customer, our group has spent a significant portion of time exploring the nature of the leasing relationships available for this type of transaction. One initial observation we see is the significant increase in the current fleet available to the business. Because of the percentage increase in the fleet, it will be important to properly protect the business with safeguards built into the leases themselves. The increase of the fleet size would constitute the bulk of the business as it stands, and the danger here is proverbially having all …show more content…
If one of these criteria is met, you would have the ability and obligation to characterize these as capital leases. This treatment would result in placing the leases on your balance sheet as assets, classifying the revenue as unearned (liability), recognizing revenue once the lease proceeds are received, and depreciating the assets …show more content…
The Financial Accounting Standards Board has stated the operational lease option is permissible when the above capital criteria are not applicable. Given the open-ended nature of the potential lease, an operational lease would allow the flexibility financially for the fleet already on hand to be leased, generating significant, consistent revenue for trailers already on hand. Since the client is relying heavily on your equipment, you will be able to charge a fair rate, and use what FASB calls a contingent rental. According to FASB, scheduled rent increases can be added into the agreement based on increasing sales volume or performance of the lessee (Non-Level Rents – Operating leases – FASB 840-10-25-2). A leasing company can add onto already-established lease rate increases due to time an additional fee for increased production, even above and beyond increases in inflation, property taxes and so on. Given the nature of the agreement, it serves as an opportunity to capitalize on your existing fleet in this way. Normal increases are to be straight-line increases, but contingents are like variable interest rates. We would suggest a hybrid lease, where incremental rates are used, but contingencies are put in place to take advantage of the increase in sales. Having the infrastructure in place to service issues with the trailers, which are generally low in maintenance, will assist the company in re-stocking
Steve J
Accounting Theory and Research ACC/541
March 10, 2000
Professor Cecil L
Regarding the potential new investing opportunities with your customer, our group has spent a significant portion of time exploring the nature of the leasing relationships available for this type of transaction. One initial observation we see is the significant increase in the current fleet available to the business. Because of the percentage increase in the fleet, it will be important to properly protect the business with safeguards built into the leases themselves. The increase of the fleet size would constitute the bulk of the business as it stands, and the danger here is proverbially having all …show more content…
If one of these criteria is met, you would have the ability and obligation to characterize these as capital leases. This treatment would result in placing the leases on your balance sheet as assets, classifying the revenue as unearned (liability), recognizing revenue once the lease proceeds are received, and depreciating the assets …show more content…
The Financial Accounting Standards Board has stated the operational lease option is permissible when the above capital criteria are not applicable. Given the open-ended nature of the potential lease, an operational lease would allow the flexibility financially for the fleet already on hand to be leased, generating significant, consistent revenue for trailers already on hand. Since the client is relying heavily on your equipment, you will be able to charge a fair rate, and use what FASB calls a contingent rental. According to FASB, scheduled rent increases can be added into the agreement based on increasing sales volume or performance of the lessee (Non-Level Rents – Operating leases – FASB 840-10-25-2). A leasing company can add onto already-established lease rate increases due to time an additional fee for increased production, even above and beyond increases in inflation, property taxes and so on. Given the nature of the agreement, it serves as an opportunity to capitalize on your existing fleet in this way. Normal increases are to be straight-line increases, but contingents are like variable interest rates. We would suggest a hybrid lease, where incremental rates are used, but contingencies are put in place to take advantage of the increase in sales. Having the infrastructure in place to service issues with the trailers, which are generally low in maintenance, will assist the company in re-stocking