There has been some criticism of current lessor accounting because of the lessor’s control over the...

There has been some criticism of current lessor accounting because of the lessor’s control over the interest rate and the residual value used in the lease. It’s been suggested that management’s control over these two items allows them to manipulate earnings reported from lease transactions. Should this issue be addressed and why?

I think that the FASB has a busy schedule and only wishes to consider items that may have a significant reporting or economic impact.

Expert Solution

Since the FASB focused its efforts on creating a model that would faithfully display by the only procedure the essence of the lease relationship regardless of nature of the lease primary only on the side of lessee, it will be very diffi cult to create easy applicable “mirror” methodology on the side of lessor. It turns out that apparently it will not be possible continue without division of leases, for example in relation to duration, specifi cs of subject of the lease realtionship or whether there is a transfer of signifi cant risks and rewards to the lessee associated with the lease. This means that it would not be possisble totally avoid the problems of intentional structuring of lease contracts with the intent to aff ect profi t or total balance sheet. On the other hand, the fact is that these tendencies always appeared on the side of lessee rather than on the side of the lessor. In the case that the course of reported revenues will vary signifi cantly over time, these eff orts can not be a priori excluded on the side of lessor, it will also depend on the relationship of reported revenues to income taxes. Therefore FASB will have a task to create criteria for leases division, which will be easily understood by users and on the other hand, it will not be easy to circumvent. In addition to this problems there are symmetrical problems on the side of lessor as on the side of lessee, ie how to deal with the estimation of expected lease period (in this case accounting entity should be more carefully due to the principle of prudency in the area of revenues), including contingent rental or guarantees for residual value into the balance sheet items etc.

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ekkarill92 answered 1 year ago

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