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ASPECTS OF LEASES
• The lease payments must provide the lessor with a fair market
rate return on the investment.
• This profit potential must exist apart from the transaction’s tax
benefits. Renewal options must be reasonable, that is, the
renewal rate must be closely related to the economic value of
the asset for the renewal period.
If the IRS does not agree that a contract is truly a lease, taxes
are applied as if the property had been sold to the lessee and
pledged to the lessor as security for a loan.
Leases and Accounting Practices
• In recent years, firms have tended to disclose more
information regarding lease obligations.
• The gross amount of assets by major classes according to nature or use reported
under financial leases as of date of the balance sheet
• The amount of accumulated lease amortization
• Future minimum lease payments as of the date of the latest balance sheet
presented, in total and for each of the next five fiscal years
• Future rental payments required as of the date of latest balance sheet presented,
in total and for each of the following five fiscal years.
• The rental expense for each period for which an income statement is presented
• The lessee must also indicate in the notes to financial statements the
existence and terms of renewal or repurchase options and escalation
clauses, restrictions imposed by leases and any contingent rental
obligations.
DETERMINING LEASE PAYMENTS:
THE LESSORS PERSPECTIVE