ACCT3563 Lecture 5: ACCT3563 - Leases

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scarletdolphin313

29 Jan 2021

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Leasing is a means of gaining access to the benefits of an asset without owning the asset. Payments are made for the right to use the asset for a specified period of time. Aasb 16 defines a lease as follows: A contract, or part of a contract, that conveys the right to use an asset (the underlying asset*) for a period of time in exchange for consideration. Aasb 16 provides the following explanation about what constitutes an identified asset: An asset is typically identified by being explicitly specified in a contract. However, an asset can also be identified by being implicitly specified at the time that the asset is made available for use by the customer. The customer can obtain the benefits directly (through use) or indirectly (e. g. via subleasing) This is normally evident in whether the customer can determine: How and for what purpose the asset is employed.

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Current accounting for leases requires that certain leases becapitalized. For capital leases, an asset and the associatedliability are recorded. Whether or not the lease is capitalized,the cash flows are the same. The rental payments are set bycontract and are paid over time at equally spaced intervals.Required:a.If one of the objectives of financial reporting is toenable investors, creditors and other users to project future cashflows, what difference does it make whether we report the lease asa liability or simply describe its terms in foot-notes?b.Theefficient market hypothesis states that all available informationis impounded in security prices. In an efficient capital market,would it make a difference whether the lease is reported as aliability or simply described in foot-notes? Explain.c. When thereare debt covenants that restrict a company`s debt-to-equity ratioand when debt levels rise relatively to equity, management may bemotivated to structure leasing agreements so that they are notrecorded as capital capital leases. Discuss this motivation interms of agency theory.

carminewoodchuck841

For each item below, identify whether or not the item described would be recorded as an asset. If âNoâ identify in the next column which characteristic of an asset does not apply. If âYesâ identify an account name that would typically be used to record this asset.

Item	Is It an Asset?	If âNo,â Why Not?
	Yes; No	No future benefit; Not owned/controlled; Not from past trans.; Not measurable
Land owned by company solely as an investment
Direct labor cost expended to manufacture inventory not yet sold
Salary paid to researcher who invented (and patented) a company product
Value of payments to contractors hired to program software for internal use
Cost of training employees to use internally-developed software
Rent paid for use of a building during the period being reported
Money paid for insurance coverage for future periods
Estimated market value of an internally-invented, patented design
Right to collect money from a customer to whom service was provided
Cost of fuel to operate equipment used in construction of a building as part of a construction contract with a customer
Value of a contract signed by both the company and customer, for which neither work nor payment has yet occurred
Loan made by the company to a company executive
Value of service to be provided in the future, for which the customer has paid
Cost of freight paid to ship inventory from the supplierâs facility (sold âFOB Shipping Pointâ) to the companyâs warehouse
Inventory transferred on consignment to a retailer
Bribe for foreign government officials to permit importation of raw materials

violetshark689

You Tell Me, Am I a Lease? (USING GAAP NOT IFRS)

Auto Inc. (Auto) is a company based in New York that manufactures automobiles and exports the finished vehicles to Europe. Auto manufactures two models; the most popular model is a four-door sedan (Sedan), and the other is a less common, highly customizable luxury sports car (Luxury Car). Auto contracts Trans-Atlantic Inc. (Atlantic) to ship its products to Europe. Atlantic has a fleet of 10 multi-use shipping vessels, each with capacity for 2,000 vehicles. The terms of the shipping contracts are as follows: â¢ Sedan contract terms: o The term is five years. o MV Manhattan, a ship in Atlanticâs fleet, is dedicated to shipping Autoâs Sedans for the term of the contract. o Auto determines (1) which European ports receive shipments and (2) the order in which deliveries are made to the ports; Auto instructs Atlantic accordingly. o Auto has the option to send the ship below capacity. If the ship is below capacity, Atlantic cannot use the excess capacity to ship products of its other customers. â¢ Luxury Car contract terms: o The term is five years. o Atlantic is required to deliver shipments of Luxury Cars within five weeks of notification from Auto that an order of Luxury Cars is ready for shipping. o Atlantic may choose any ship from its fleet to complete the request. o Auto may provide 250 to 2,000 Luxury Cars in a single request; however, shipping requests of Luxury Car generally do not exceed 500 vehicles in a single request because of the lower production volume and longer manufacturing time of Luxury Car. o Atlantic has the option to use excess capacity to ship products of its other customers. o After notification from Auto that Luxury Cars are ready to ship, Atlantic determines when within the five-week period to ship the cars, as well as the shipping route. Autoâs CFO understands that the new leasing standard has certain provisions that may affect how the company treats contracts of this nature.

Required: Analyze the above and prepare a memorandum addressing the impact (if any) of the new leasing standard on Autoâs shipping arrangements for the following considerations:

1. Determine whether each of Autoâs contracts with Atlantic for Sedan and Luxury Car contains an identified asset.

2. Determine whether each contract conveys the right to control the use of the identified asset to the lessee.

coffeeclam704

ACCT3563 Lecture 5: ACCT3563 - Leases

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