ACCOUNTING FOR LEASES

ACCOUNTING FOR LEASES

Accounting has been described as “the language of business.” Using accounting standards, financial statements such as the income statement, balance sheet and statements of cash flows can be analyzed and compared with the recognition that there are common terms and a common understanding as to how each of these documents are created. This commonality has not happened by accident; accounting standards have been established by the Financial Accounting Standards Board (FASB) and also by professional organizations. The government also imposes accounting guidelines and requirements; the recent Enron and WorldCom scandals resulted in the Sarbanes-Oxley Act that made these requirements even more stringent. While there is general agreement about how to account for assets and liabilities, questions have arisen when companies do not own a particular piece of equipment or capital outright, but instead lease it. There are standards in place today to handle lease obligations, but there have also been calls from stakeholders to change the requirements to more accurately reflect the effects that leases have on business. Given the recent accounting scandals and the “off balance sheet” financing used at Enron, it is not surprising that leases are receiving increased scrutiny. This research considers the special case of leases, the current model, and how modifications that might be made.

When companies decide that they need a particular piece of equipmentùsuch as a forkliftùor a new facility or even office furniture, they typically decide on the specifics of the equipment and then consider financing options. The most straightforward transaction is for the company to purchase the item outright. This results in a transfer of title and the right to use and dispose of the equipment however the company wants. The company can also depreciate the good from an accounting standpoint, which has certain tax benefits (“Advantages,” 2006).

The issue…

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