Wiley GAAP 2008

Perspective and Issues

Introductory Discussion

Lease transactions have grown in popularity over the years as businesses sought new ways to finance long‐lived assets. As of 2005, the Securities and Exchange Commission estimated that collectively for all publicly held companies, there were approximately $1.3 trillion of off‐balance‐sheet lease obligations outstanding. FASB is reexamining lease accounting and well may, in the relatively near term, decree that all, or nearly all leases (e.g., those over one year in duration) be reported on the balance sheet—as capital leases are under FAS 13 and associated literature today; if this happens, there may well be somewhat reduced utilization of leasing as a financing alternative.

There are several economic reasons why the lease transaction is considered a viable alternative to outright purchase. These would likely remain strong motivations even if lease accounting rules were to be revised.

1. The lessee (borrower) is frequently able to obtain 100% financing

2. Income tax benefits available to one or both of the parties

3. The lessor receives the equivalent of interest as well as an asset with some remaining residual value at the end of the lease term

A lease agreement involves at least two parties, a lessor and a lessee, and an asset that is to be leased. The lessor, the party who either owns or commits to purchase the asset, agrees to grant the lessee the right to use it for a specified period of time in return for periodic rent payments.

The lease ...