Question

At a corporate board meeting, one of the members indicates that the FASB has passed a new accounting update to take effect concerning the nature of lease accounting. As of now the company has leases which are both capital in nature and operating. The company also has several forms of debt with banks. The board member asks you as the Chief Financial Officer to give a 5-10 minute presentation on a summary of changes and how those changes could impact the company.

I am still very confused on this, and my head feels like it's spinning, lol.

I also want to know "the company also has several forms of debt with banks", how would that be affected by this?

Help would be appreciated!

Answer 1

Good evening Dear all.

   As you all know we are going to face a tremendous change in the lease policy we used. and as per the instruction from authorities, we have to implement the new approach to the effect of December 15, 2018, as ours is a public company. You will know about our current leas system. As per the current system, there are two types of the lease in our country That is

1. Capital Lease
2. Operating lease.

The Lease which is more than for a period of one year is called capital lease. this kind of leases will be replaced by the financial lease. Any lease for a period more than one year and satisfying any of the following criteria can be treated as financial Lease.

Criteria regarding the financial lease.

1. The lease grants the lessee the option to purchase asst the lessee is responsibly is certain to excursive.
2. The lease transfer the ownership of the asset by the end of the lease term.
3. The lease term is for the major part of reaming economic life of the underlying asset. (Previously used 75%RULE)
4. The present value of some of all lease payment and any residual value guaranteed by the lessee that is not already reflected in the lease payment residual or exceeds substantially all of the fair value of the underlying asset (50%) previously.
5. The asset of such a special character regarding which no alternative use is expected to the lessor at the end of the lease term.

Effect on financial statements.

As per the new rule almost, all lease and liabilities concerned with such lease have to be recorded on the company balance sheet which was previously treated as off-balance sheet items. that will make changes in the debt-equity ratio, working capital ratio. to the extent of which it will be affected can be only determined by the verification of financial statements.