International Accounting Standards no. 17 states that a lease may qualify either as a capital lease or operating lease (http://www.ifrsclass.com/gaap/ias/ias-17.htm). Under capital lease, all the risks and rewards are transferred to the lessee. To resolve the differences between the two international accounting standards, both accounting boards agreed to meet to come up with a common stand on capital lease accounting scheduled in 2011. (Kirk 2005; 85). The proposal to capitalize all leases should not be implemented.
The proposal to implement the capitalization of all leases should not be implemented. Capitalization entails ownership. Capitalization means that the company has to depreciation the assets. Thus, it would be illogical to implement the proposal to capitalize all leases. The new proposal states that operating leases should be capitalized. Under the current accounting environment, there are minimum guidelines to be followed before a lease is capitalized. A lease that does not qualify as capital lease is recorded as an operating lease. This is illogical because the lessee is just renting (borrowing) the premises and is not buying.
Under the capital lease, the lessee can include the capital lease asset as part of one’s total assets. This will create a better financial picture of the company when compared to not having the leased property capitalized. Second, the company can use the capitalized assets as collateral for the processing of the company’s new long term loans. The banks will scrutinize the financial statements to determine if there are enough assets to cover for possible nonpayment of loans or other payables (Elliot & Elliot). This would be illogical because the company does not own the building or facilities rented.
Further, the lessee becomes the owner of the property after fulfilling the requirements set forth under International