Stocks Essay

1357 words - 6 pages

Introduction:
Leases are the contractual agreement among the lessor(the owner of assets) and the lessee, where the former part allows the latter to use the assets for a specified period of time in return of periodic payments ranging over years.
Important to note that leases are classified as Operating Leases and Financing Leases. A finance lease refers to purchase of an asset owned by lessor by using debt financing. Thus, at the inception of lease, the lessee will add equal amounts of both asset and liability on the balance sheet. Since, the asset is purchased through debt financing, lessee will recognize depreciation expense related to asset and also interest expesne inrelation to debt acquired to purchase that asset. On contrary, operating lease is a more kind of rental agreement between lessor and lessee. Thus, under this kind of lease agreement, lease payments are simply recognized as rental expenses in the income statement of the entity.
Lessee’s Perespective: Difference between IFRS and US GAAP Treatments
Under IFRS, the lease is classified by the economic substance of the transaction, if substantially all the rights and risks of ownership are transfered to the lessee, the lease is classfied as finance lease. Following are the criterias, that if fullfilled, the lease is classified as finance lease;
 If the entitlement to the lease is transfered to the lessee at the end of the lease.
 At the concluding year of lease agreement, the lessee can purchase the leased asset for a price that is significantly lower than the fair value of the asset at some future date
 The term of the lease covers major portion of economic life of the asset.
 The present value of the lease payments to be received in the future is equal to the fair value of the leased asset.
 The physical or techncial properties of the leased asset is so specialized that only the lessee can use the asset without significant modification.
In concern for treatment of lease accounting under GAAP is similar to IFRS, but GAAP treatements are more speciifc than under IFRS. Thus, a lessee is required to consider the lease as finance lease if ‘’any’’ of the following conditions are met:
 If the entitlement to the lease is transfered to the lessee at the end of the lease.
 The lease period is 75% or more of the asset’s economic life.
 A bargain purchase option permits the lessee to purchase the leased asset for a price which is lower than the fair market value of the asset at some future date.
 The present value of lease payment is 90% or more of the fair value of the leased asset.
Thus, if any of the above criteria is not met, the lease will be classified as operating lease. From the perspective of lessee,he will always prefer to enter into operating lease because no liability will be reported under operating lease and hence better ratios will be achieved.

Summary: Lessee Perspective and treatment under IFRS and US GAAP
Both GAAP and IFRS requires that the lessee bears all the risk...

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