Question

Question: Based on what I answered, how can I reply to this comment supporting my opinion? (It can be short.)

Comment: Prior to this pronouncement, future lease obligations were disclosed in a note to the financial statements, so investors were well-aware of the future obligations. That, to me, is the most important disclosure relative to what we once knew as operating leases. Given that the lessee is never going to own the leased asset, it would seem to me that the asset portion of the new requirement boosts the balance sheet with fake assets. I will concede the the lease liabilities are a good addition. So my question is, why do you think issuers asked for this? It has a net zero impact on the financials.

1. What is the main change offered by this pronouncement?

The main change is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating lease. Lessees should be required to recognize the assets and liabilities arising from leases on the balance sheet. The Board consulted extensively on the approach to lease expense recognition and considered a number of alternatives.

2. How were operating leases accounted for in the past?

It didn't require lessees to recognize assets and liabilities arising from operating leases on the balance sheet. it had made long-standing requests from many users of financial statements and others to change the accounting requirements.

3. Is this an improvement? Support your answer.

In my opinion, it is an improvement.

First of all, as mentioned in the Summary, it increases transparency and comparability among organizations. Also, it gives a complete and understandable picture of an entity's activities for many entities that enters into a lease. With an enough information, users supplement the amounts recorded in the financial statements so that they can understand more about the nature of an entity's leasing activities. In addition, it has implementation guidance to assist entities in determining whether the transfer of an asset in the context of a sale and leaseback transaction is a sale.

Answer 1

Prior to this pronouncement, future lease obligations were disclosed in a note to the financial statements, so investors were well-aware of the future obligations. That, to me, is the most important disclosure relative to what we once knew as operating leases. Given that the lessee is never going to own the leased asset, it would seem to me that the asset portion of the new requirement boosts the balance sheet with fake assets. I will concede that the lease liabilities are a good addition. So my question is, why do you think issuers asked for this? It has a net zero impact on the financials.

1. What is the main change offered by this pronouncement?

The main change is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating lease. Lessees should be required to recognize the assets and liabilities arising from leases on the balance sheet. The Board consulted extensively on the approach to lease expense recognition and considered a few alternatives.

Though there will not be any financial impact, as the asset is increased along with increase in liabilities, this presentation will give an accurate picture of financial position. Assets are expenditure from which future economic benefits are expected to occur. In an operating lease agreement, the lessee is going to get future economic benefits from the asset. Hence, the same can be recognized and presented. Similarly, as the lessee also has obligations arising from past events, the lease payments are shown as liability. Disclosure in financial statements will not present the financial impact on financial position. Hence, this presentation of asset and liability is more apt.

2. How were operating leases accounted for in the past?

It didn't require lessees to recognize assets and liabilities arising from operating leases on the balance sheet. It had made long-standing requests from many users of financial statements and others to change the accounting requirements.

Operating lease is a lease which is not a finance lease. It implies that there is no indirect financing arrangement. The lease payment is recognized as expense in financial statements. No asset or liability is recognized in financial statements.

3. Is this an improvement? Support your answer.

In my opinion, it is an improvement.

First of all, as mentioned in the Summary, it increases transparency and comparability among organizations. Also, it gives a complete and understandable picture of an entity's activities for many entities that enters into a lease. With an enough information, users supplement the amounts recorded in the financial statements so that they can understand more about the nature of an entity's leasing activities. In addition, it has implementation guidance to assist entities in determining whether the transfer of an asset in the context of a sale and leaseback transaction is a sale.

It is an improvement, as more than disclosure, financial impact is quantified and recognized in financial statements. The liability arises from past events and hence, according to the principles of accounting, it should be recognized. Similarly, asset should also be recognized.