Lease Accounting. There an Exposure Draft Issued

¶ … Lease accounting. There an exposure draft issued FASB leases. Go FASB website download a copy exposurte draft. Prepare analysis paper approximately 5 pages double spaced. 1. Lease accounting As the business community evolves and becomes faced with more and more challenges, the economic agents are forced to develop alongside. They as such devise and implement a wide array of business strategies aimed at increasing their operational efficiency, their financial strength and stability, their productivity and profitability.

One example of how the economic agents strive to increase operational efficiency by maximizing resource utilization is represented by the signing of lease contracts. These contracts are characterized by the fact that the good subjected to the contractual agreement is under the property of the owner (lessor) and the usage of the lessee. The lessee pays monthly rent for the respective item and has the possibility to eventually make an integral payment and become the full owner of the item.

The economic agents come to more frequently use lease agreements due to the multitude of advantages they create. For once, leasing items necessary for the companies, such as manufacturing equipments or company automobiles, generates a decreased initial investment. Then, from an accounting standpoint, lease payments can often be deducted as operational expenses, leading as such to a reduction of the total cost of leasing. Finally, leasing is highly useful in the rapidly evolving technologic community, where items rapidly become outdated.

By leasing rather than buying, the company is easily able to replace the items used. Aside from these advantages however, lease contracts also have some notable disadvantages, the most important of them being the relative high cost of leasing, combined with the fact that the company is not the real owner of the leased product (Forbes). In such a complex setting, accounting procedures in lease contracts are also intriguing and it is required that they be regulated in order to ensure consistency across the industries.

Within the United States, accounting for leasing contracts is regulated by the Financial Accounting Standards Board (FASB) through the 13th financial accounting standard. A first step in this sense is represented by the classification of the lease in the meaning that it is necessary to assess if it is a financial lease or a non-financial lease.

Additionally, the accounting regulations have to clearly specific if the lessee intends to purchase the product at the end of the leasing period, or whether he/she wishes to only use it under the lending terms.

Other characteristics of the accounting procedures surrounding the lease contracts under the current framework include the following: The recognition of the lease as a liability and an asset The recognition of the leased item at its fair value at the inception of the lease contract The readjusting of the asset and liability value based on the net present value, in case this is different from the real value The determination of the net present value of the leased item with the aid of the discount rate or, if this is not possible, through the employment of the incremental borrowing rate The valuation of the leased item through the deviation from the cash value, concomitant with the analysis of the item under lease (Ghosh).

These current regulations of the Financial Accounting Standards Board were nevertheless established in 1977 and have not been modified since. Today then, in the complex contemporaneous business society, lease accounting regulations become unable to provide the necessary framework for the lease contracts. In accordance with this limitation, the FASB is now seeking to expand and improve its policy framework for the application of lease accounting. The propositions for development are still ongoing and they would be implemented at the earliest by the end of the current year.

The lease accounting exposure draft was created by both FASB as well as IASB (International Accounting Standards Board) and it was agreed upon by the two institutions in an effort to create consistency across industries and align the lease accounting regulations with the contemporaneous realities. As it has been observed before, the current accounting regulations are based on the valuation and classification of the leased item.

Some notable stipulation of the FASB and IASB exposure draft include the following: The establishment of an accounting method that would recognize the leased assets and liabilities within the balance sheet. The elimination of the complex methods of value estimation and their replacement with more simplistic and transparent methods of viewing the company and its financials, such as cash flows or liabilities. The better management of the future cash flow through the introduction of variable payments.

In other words, companies would be presented with the opportunity to accelerate or slow down payments and these modifications would be reflected in their financial statements (Website of the FASB, 2012). "The proposals would result in a consistent approach to lease accounting for both lessees and lessors -- a 'right-of-use' approach.

Among other changes, this approach would result in the liability for payments arising under the lease contract and the right to use the underlying asset being included in the lessee's statement of financial position, thus providing more complete and useful information to investors and other users of financial statements" (Website of the FASB, 2012). The improvements proposed at the level of lease accounting would create a series of benefits for the business community, these benefits being both direct as well as indirect.

At a primary level for instance, the first benefit would be felt by the investors, who would become better able to access information about various companies. In such a setting, the overall transparency of business operations would be improved and the indirect benefits would be revealed at the society level, such as the creation of employment opportunities in financially stable.