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Hi! My name is Jeffrey Taylor and I authored the two most popular equipment leasing books used by equipment leasing companies all over the world. Written in 2003 and 2006 they are still used by the most profitable leasing organizations in the world to train their top sales and financial professionals to achieve superior performance. To see a current client list click here. For more information please visit Books on Equipment Leasing. FASB 13Equipment leasing companies depend on the rules and regulations issued by the seven members of the Financial Accounting Standards Board (FASB) for public accounting and reporting guidelines. FASB, headquartered in Stamford, Connecticut, issued its first FASB Statement on Foreign Exchange in 1973. Since that time, FASB has issued over 150 Statements, plus a substantial amount of Technical Bulletins, Opinions, Concepts, and Interpretations.Prior to the standardization of lease accounting, equipment leasing companies could account for leases in whatever manner best benefited them. Each company did their own thing and it was virtually impossible to compare the performance of one company to the next. In 1976 FASB issued FASB 13. This historical moment began the standardization for lease accounting and reporting. Even today, there are still many different interpretations of key words contained in this famous statement. Most FASB's are first issued to the public in draft format. In conjunction with the Emerging Issues Task Force (EITF) and several public debates, FASB issues final drafts. After many years FASB's are issued with an effective date for implementation. In many cases, implementation dates are 2-3 years in the future; allowing corporations to make the necessary accounting and systems changes to comply with the new rulings. FASB 13 covers the basics for lease accounting. It sets the standards for the Financial Accounting and Reporting for Leases in the following sections:
For purposes of this Statement, a lease is defined as an agreement conferring the right to use property, plant or equipment (land and/or depreciable assets) for a stated period of time. FASB 13 states that there are two classifications of leases for lessees and four classifications of leases for lessors. For lessees, leases, which meet one or more of the criteria listed below, are called Capital Leases. All other leases are called Operating leases. For lessors, leases are either Sales-type leases, Direct Finance Leases, Leveraged Leases, or Operating Leases. In general, Sales-type leases give rise to manufacturer's or dealer's profit or loss. Normally, sales-type leases will arise when a manufacturer or dealer use leasing as a means of marketing their products. Direct Finance Leases meet the criteria listed below. Leveraged Leases are Direct Finance Leases with the addition of third party debt. All other leases are operating leases. Criteria for Classifying Leases The criteria for classifying leases derives its concept from the view that a lease which transfers substantially all of the benefits and risks incident to the ownership of property should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee and as a sale or financing by the lessor. All other leases should be accounted for as operating leases. If at its inception a lease meets one or more of the following four criteria, the lease shall be classified as a capital lease by the lessee. Otherwise, it shall be classified as an operating lease.
Leveraged Leases meet the criteria of a Direct Finance Lease with the following additions:
Through the use of FASB 13, U.S. companies still keep off their balance sheets billions of dollars of lease obligations, only reporting the item as an obscure footnotes. Debt levels are among the most important measures of a company's financial health. But the special accounting treatment for many leases means that a big slice of corporate financing remains in the shadows. Given the choice between leasing and owning real estate or equipment, many companies pick operating leases. Besides lowering reported debt, operating leases boost returns on assets and often plump up earnings through, among other things, lower depreciation expenses. Investors complain that the 90% test drives the structuring of the deal and ignores economic reality. The accounting literature on leasing covers hundreds of pages. FASB's original 1976 pronouncement, FASB 13, does state a broad principle: A lease that transfers substantially all the benefits and risks of ownership should be accounted for as such. But in practice, critics say, FASB 13 amounts to all rules and no principles, making it easy to manipulate its strict exceptions and criteria. FASB and IASB are in the process of rewriting lease accounting rules in order to make sure that both lessor and lessee account for the same transaction in the same way. By doing this, the two boards hope to make lease accounting more transparent and to ensure that international accounting follows one standard. |
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