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Accounting For Leases And New Proposed Models - Essay Example

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Accounting For Leases And New Proposed Models

The International Accounting Standards Board calls for a new lease accounting principle that relates to assets and liabilities. This write up proposes criteria to be set for deciding between two interpretations of whether the lease increases or decreases both assets and / or liabilities. SFAS no. 13, which was issued by FASB, was at that time, 2001, showing improvement on the setting of accounting standards for leases. Many write ups on leases followed suit such as 9 FASB amendments, 12 FASB technical bulletins, EITF consensus, 6 FASB interpretations and others. The FASB is continually working to come up with an adjustment to the Statement of Financial Accounting Standards no. 13 (lease) because it has failed to address many questions by many sectors of the accounting, school, business and other companies on the accounting procedures and interpretation of leases.
SFAS no 13 states that an asset can be considered a capital lease, where the value of the leased property is included in the balance sheet of the lessee, If the four conditions listed a are met: a) The lease conveys ownership to the lessee at the end of the lease term. b) The lessee has an option to purchase the asset at a bargain price at the end of the lease term. c) The lease term covers 75% or more of the economic life of the asset. d) The present value of the rental payments when using the lessee’s incremental borrowing rate is ninety percent or more of the fair market value of the asset.
TWO ALTERNATIVE CONCEPTS OF LEASE ACCOUNTING

One of the main points of SFAS 13 is that all lease contracts generate obligations that should be presented in the balance sheet, contrary to what the Financial Accounting Standards Board believes. In fact, SFAS no. 13 states that "a lease that transfers substantially the entire benefits and risks incident to the ownership of property should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee and as a sale or financing by the lessor. All other leases should be accounted for as operating leases. (FASB 1976, para. 60)" FASB differs this by saying that not all lease contracts create both a new asset and a new liability.

The FASB and G4+1 group have been implementing the FASB standard on lease recording. Companies in Canada, Australia, United Kingdom and New Zealand have also been following the FASB standards.

THE CONCEPTUAL FRAMEWORK AND ACCOUNTING FOR LEASES

When assessing the generally accepted accounting principles states that accounting information that should be included in the financial statements are those that are submitted on time to the decision makers. These financial statements must also be relevant to the decision making process. Further, the financial statement items should stated in such a way as to permit comparability between two accounting periods or two or more financial entity who are subsidiaries, branches or competitors.

Therefore, when rights and obligations are recorded in a lease contract, intangible assets are created. An airline company comes into "existence" when it buys an airplane. According to monsoon,

There is a possibility that lessees may record the lease asset in the balance sheet will be boundless because intangible assets cannot be easily estimated. When a bank ...Show more

Summary

Lease is the periodic payment, usually paid per month, by the lessor to the lessee for use of property rented. There have been many opinions, counter opinions regarding better ways to record these lease contracts…
Author : zkoch
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