Question

“All leases beyond a year be capitalized!” Evaluate this position. [Chapter 16 - 9th edititon]

Textbook: Accounting Theory: Conceptual Issues in a Political and Economic Envirnoment (9th edition) by Wolk, Dodd & Rozycki

Answer 1

All leases beyond a year be capitalized!”

The accounting controversy about leases focuses on distinguishing between the economic substance of leases and their legal form. In current scenario, some leases are veiwed as the equivalent of purchases with debt financing. This view now dominates, and this lease are now known as finance lease and accouting procedures for them is called capitalization. Non capitalised leases are called operating leases and the lease payemnts are therefore treated as peridic expenses.

Leased Equipment and Facilities

Leased equipment and facilities should be capitalized if the lease agreement meets any one of the four criteria below. Also, a contractual lease obligation for a facility, that at its inception, meets any of the following four criteria, should be capitalized:

• The lease transfer ownership of the property to the University by the end of the lease term.
• The lease contains a bargain purchase option.
• The lease term is equal to 75 percent or more of the estimated economic life of the leased property.
• The present value of the lease payments at the inception of the lease, excluding executory costs, equals at least 90 percent of the fair value of the leased property.

Leases that do not meet any of the above requirements should be recorded as an operating lease.