Respond to the following: a. Why has so much attention been given to leases in accounting standards? b. Why is leasing such a popular method of acquiring assets? c. How have accounting procedures for leases changed since ARB 43?
What will be an ideal response?
ANSWER:
a. The attention given to leases in accounting standards reflects the increased use of leasing in the business community and the need to clarify and standardize the accounting for this complex transaction.
b. Leasing has become popular for a number of operating and financial reasons. From an operating viewpoint, some assets are available only under lease; others are too expensive for outright purchase. Two significant financing aspects are the tax advantages (lease payments are fully deductible) and the possibility of off-balance-sheet financing, which occurs when leased assets and lease obligations are not reported in the financial statements. Off-balance-sheet financing results in better debt ratios and higher accounting rates of return than a purchase alternative could produce.
c. The accounting controversy about leases has focused on distinguishing between the economic substance of leases and their legal form. Prior to ARB 38, the accounting procedure for lease payments was to record them as periodic revenues for lessors and as expenses for lessees. Increasingly, however, some leases came to be viewed as the equivalent of purchases with debt financing. This view now dominates, and the focus of accounting standards has been on defining those situations in which a lease is considered to be a purchase equivalent and in making such leases look like a purchase with debt financing. These types of leases are called capital leases, and the accounting procedure for them is called capitalization. Non-capitalized leases are called operating leases, and the lease payments are treated as periodic expenses.
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