Running head: LEASING PROMULGATIONS

Leasing Promulgations
Claudette Zuokemefa
Walden University
Accounting Theory and Application ACCT 6620
Dr. Wendy W. Achilles, CPA
October 17, 2015
Leasing Promulgations

This paper will compare capital and operating leasing and explain how each are classified
on financial statements as well their classification and the changes in how lessees are reported
over time and the effect on accounting practices.
Capital versus Operating Leasing
Capital leases are treated as debts of the lessee and are reported on the liabilities
side of the balance sheet. Since a capital lease is, define as in-substance installments purchases
(Schroeder, Clark, & Cathey, 2014, p. 465) which allow a business who is leasing, the transfers
substantially all of the benefits and risk of the ownership of property, which is considered assets

and they may be depreciated by lessee and a sale or financing by the lessor (Schroeder et al.,
2014, p. 464).
In contrast to capital leases, operating leases are normally used for short-terms leasing
example car rental and similar computers and other technology equipment that has a trend to
fluctuate quickly. Operating lease the rent payment made on operating lease are normally
charge to expense as they become payable over the life of the lease (Schroeder et al., 2014, p.
466), the lessee records the operating lease as an operating expense on income statements.
Classification
The U.S.GAAP lease accounting regulation promulgated by the FASB is FAS 13,
Accounting for Leases (now known, as Topic 840 under the FASB's new Accounting Standards
Codification and the IASB's primary lease accounting regulation is IAS 17, Leases. Have a
difference in the classification of leases; for example the e Bright Line Test tests of FAS 13
which states whether the lease term is 75% or more of the economic life, and whether the present
value of the rents is 90% or more of the fair value which merit between capital and operating
leases that aid in regulates who has ownership rights the lessor or the lease, and who takes can
takes depreciation for the leased assets as well how to treat lease costs as expense(Lee, 2003)
which is not a condition used by the IASB, which classification method that involves more of
judgment calls to extent to which risks and rewards of ownership of the leased asset are
transferred to the lessee or remain with the lessor ("IAS 17," 2009)
Effects on a Balance Sheet
A capitalized lease increases the overall value of assets reported on a balance sheet., it
have an effect on the number of ratios that creditors, and shareholders use to assess a business

LEASING PROMULGATIONS
profitability(Shim, Siegeal, Dauber, & Qureshi, 2015), in addition the lease also appears as a
liability, this affects measures of financial leverage, such as liabilities-to-equity ratio.
Since the reporting of a capital lease can hurt a business debt ration it is best for a
business to structure leases to report them as an operating lease since operating leases are not
reported on the balance sheet an asset or liability.

LEASING PROMULGATIONS

4
References

Definition and Classification of Leases [IAS 17] [Magazine]. (2009, April). Accounting
Financial & Tax. Retrieved from http://accounting-financial-tax.com/2009/04/definitionand-classification-of-leases-ias-17/
Lee, S. (2003). Capital and Operational Leases [Report]. Retrieved from FASAB:
http://www.fasab.gov/pdffiles/combinedleasev4.pdf
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2014). Financial Accounting Theory and
Analysis Text and Cases (11th ed.). Hoboken, NJ: John Wiley and Sons.
Shim, J., Siegeal, J., Dauber, N., & Qureshi, A. (2015). Barons Accounting Handbook (6th ed.).
Hauppauge, New York: Barons educational series.