¶ … 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 Finally, leasing is highly useful in the rapidly evolving technologic community, where items rapidly become outdated.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...
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…
