Leases. Principles for Financial Reporting, ASB Essay

Leases. Principles for Financial Reporting, ASB - Essay Example Operating leases are known to be one of the off-balance sheet obligations; therefore, the placement of lease accounting continues to be one of the priorities for Financial Accounting Standard Board (FASB) and the International Accounting standards Board (IASB). During March 2009, these boards issued paper referred to as Leases: â€Å"preliminary view† which clearly outlined the proposal for new global lease accounting standards. The proposed standards would need the replacement of all operating leases with the capital leasing thus, triggering a shift of billions of dollars to the balance sheet across North America which was estimated that 70% of the total lease value would be capitalized if it involves commercial real estate. Then the end result of these change of the magnitude will be vast shift rippling through all financial reporting, the processes and merits across all us and global industries. Introduction: In the current UK accounting standard, it is important to underst and that for any accounting purpose leases are generally classified as being either financial or operating standards: First, the word lease simply means an agreement between two parties involving a hiring of asset. The lesser is a legal owner who lets out the asset to the lessee and then at the end of the lease, the asset is returned to the lesser; The only thing that the lessee will do, is to continually pay a lease rental to the lesser for using the assert. Under the SSAP 21, the term financial lease is defined as any lease contract that transfers substantially all the risk as well as the reward of ownership to the lessee, There is a reputable presumption that if, at the inception, the total percent value of a minimum lease payment amounts to at least 90% or even more of the value of the leased asset (Patterson, R., 2002). In order to rebut this presumption, the preparers of financial statement might consider looking for other indications about the risks as well the rewards, thoug h rebuttal is usually expected only to happen in exceptional circumstances. On the other than, operating lease, is that type of lease where risk and reward of ownership of the assets remain with the lesser concerns regarding off-balance sheet nature for operating lease, different treatment of similar transaction as well as the whole approach have lead to many standards-setting bodies to treat leases consistently. Accounting treatment for leases: Accounting treatment for operating lease: It is generally very easy and straight forward for both the lesser and the lessee. Under operating lease, the lessee is the one who incurs the operating expenses, thus, lease rental payable are written off in the profit and loss account (Alexander, D., Britton, A., & Jorissen, A., 2005). This must to be disclosed in the notes to the account showing the amount charged in the year as well as those of payment which the firm is committed at the end of each year. The leaser continues to earn revenue out o f renting out the asset and accordingly recognizes the amount of lease rental receivable as an income in the profit and loss account. Accounting treatment of financial lease by the lessee: When any lessee enters into a financial lease, then it gets access to the risk and rewards of the asset and therefore, the lessee reflects the substance by recognizing all assets leased in separate accounts which is also consistent with the ASB’s statement of principle which defines recognition criteria of assets. Then the lessee capitalizes the present value of all the minimum lease payments as fixed assets and the amount is recorded as a liability (Bircher, P, 2006). The PV of minimum lease pay