CPAs appear destined to soon learn new lease accounting standards that are different than those previously studied and practiced in the US. Most accountants have agreed that reform was required for this component of courses for CPA study. Especially troubling was the distinctive way leases were treated under Generally Accepted Accounting Principles used in the US compared to the rest of the world.
A slow process has unfolded to bring lease accounting under GAAP closer to International Financial Reporting Standards used in other countries. Convergence with IFRS has been hampered by concerns about the adverse result on reported financial conditions of US companies. However, accountants discover early in their study for CPA exam completion that lease accounting in the US has not fully disclosed a company?s leverage and the assets used in its business.
Accounting for lease activities has become a vital issue because many organizations rely upon these arrangements as an alternative to financing asset acquisitions. Accountants learn in CPA preparation courses that the US model classifies lease obligations as either operating leases or capital leases. Operating leases do not appear as liabilities on a company?s balance sheet. By contrast, the capital lease for an asset that covers substantially all of its useful economic life does affect balance sheet liabilities and assets.
Because an operating lease is only reported by recording the payments as expenses, the US standards have been criticized for failing to provide an accurate representation of financial condition. Consequently, the governing body over GAAP ? the Financial Accounting Standards Board ? and the International Accounting Standards Board have published proposed changes to lease accounting. Following a comment period, agreement on finalized standards will substantially alter CPA study materials.
The suggested approaches devised by the FASB and the IASB require a company to recognize assets and liabilities on its balance sheet for all leases lasting more than twelve months. However, full impact of the recommendations is reserved for leasing of assets other than real estate. The governing boards are also proposing new disclosures that enable users of financial statements to comprehend the full effects of lease obligations. This concept thus foretells changes in audit designs to comply with principles from CPA study courses. However, the FASB proposal provides some variance for non-public companies.
None of the anticipated changes to lease accounting are expected to become effective until at least three years. This gives companies time to comply with new standards and possibly renegotiate loan covenants that restrict liability amounts. Suddenly recording leases as liabilities could cause default under some of these borrowing agreements. Reported profit is also altered by implementation of new lease accounting. Companies will record finance charges under a lease in higher amounts during the early portion of the lease term. In addition, more of the value of the leased asset would be written off as an expense in the initial years of the lease.
Real estate leases under the proposals will function a little differently. Although they are also designated for inclusion on the balance sheet, straight-line expensing on the income statement is allowed. An asset value will be based on expected lease payments for the full leasing term. Any variables triggering additional lease payments ? such as percentages of sales ? are ignored on balance sheets.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
Tags: courses for CPA, CPA study materials
Isaac path Tropical Storm Isaac path Hurricane Katrina Hurricane Isaac Path Isaac Hurricane earthquake san diego Hurricane Isaac
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.