AASB 117 Term Paper

After the adjustment of lease payment, the Income Statement and Balance Sheet of MYX should be reformulated to reflect the changes. The remove of R&D expense will increase the net operating profit regardless of the tax effect by a decline of operating expense. Accompanied with the adjustment, depreciation on R&D asset is arisen over its economic life, which will have opposite effect as the remove of R&D expense to the net operating profit. Besides, tax effect should also be considered along with the adjustment. The remove of R&D expense will increase the taxable income and further add tax on COIBT. And the rise in depreciation will result in more tax benefit to reduce the tax on

Then thirdly, the operating lease is when the lessor depreciates the leased asset according to its depreciation policy. The maintenance costs of the leased asset are charged as an expense, the costs, such as finder’s fees and credit checks, are amortized over the lease term, and the leased equipment and accumulated depreciation are shown as equipment leased to others. Usually any lease that do not fall under the criteria for a direct financing lease or sales-type lease are recorded as an operating lease.

At the lease commencement, finance leases are capitalised at the fair value of the leased property, otherwise the present value of the minimum lease payments if lower (MHI, 2014). Other short term and long term payables include the relevant rental obligations and net of finance charges (MHI, 2014). Every lease payment is apportioned between the liability and finance charges (MHI, 2014). The finance cost is indicated in the comprehensive income statement for the lease period as well as to generate a constant periodic rate of interest on the remaining balance of the liability for each period (MHI, 2014). During the lease term, the depreciation is considered for the useful life of the asset such as the property, plant and equipment assigned under finance leases (MHI, 2014). The portion of the risks and rewards of ownership are persevered by the lessor are categorized as operating leases for leases (MHI, 2014). For the period of the lease, all payments made under operating leases less any incentives from lessor are indicated in the comprehensive income statement on a straight-line basis (MHI,

From the above classification we can see that all the points indicate that the leases undertaken by David Jones Ltd as a Lessee are Operating Leases or Finance leases and can be determined using the steps above. Being such a big company, David Jones Ltd has both Operating and Financial leases and they are taken mainly to run the firm’s stores and warehouses. Under the annual report for the half year ended 2013 it is clearly evident that the cost of leasing activities for David Jones Ltd has increased by 4.17mn. “Payments made under operating leases, where the lease agreement includes predetermined fixed rate increases, are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease. Other operating lease payments are expensed as incurred. Lease incentives received are recognised in the Statement of Comprehensive Income as an integral part of the total lease expense and spread over the lease term.”

A company may use capital leases to finance its acquisition of capital assets. In lease financing a company must met the criteria of the Financial Accounting Standards Board (FASB) on capital leases. In this a company must record both a liability, and a related asset on its balance sheet. In reporting capital lease a company reports the lease at its present value of the minimum lease payments. The company allocates these lease payments using the effective interest method to interest expense. This allocation using the effective interest method reduces the lease liability of the company.

A direct financing lease is defined in ASC 840-10-25-43(b). Again, a direct financing lease must meet the conditions to be classified as a capital lease along with not giving a profit or loss to the lessor and does not meet the criteria for being a leveraged capital lease presented in ASC 840-10-25-1. Direct financing leases recognize a net investment in the lease and selling loss from lease, if applicable. (ASC-840-10-25-7). It would also recognize interest revenue when payments are received.

Therefore in this agreement the equipment is going to be partially financed by the lessor (Northwest) through a third-party financial institution (Lender) and act as a leveraged lease, wherein the lending company holds the title to the leased asset, while the lessor creates the agreement with the lessee (BNRR) and collects the payment for the use of the equipment. Therefore the lease in this case will be regarded as a financial decision for BNRR

There are two possible alternatives being considered: 1) classify the arrangement as a capital lease, or 2) classify the arrangement as an operating lease. To classify the lease, ASC 840-10-25-29 states that “If at its inception a lease meets any of the four lease classification criteria in paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease.” On the contrary, if none of the criteria are met, the lease should be classified as an operating lease (ASC

A Lease is a conveyance or grant of the ownership of land to proceed for a period of years or other secure period in consideration of a rent reserved. The lessee (Sheron Day) covenants to perform certain obligations such as pay rent and keep the premises in good repair and the lessor (Steadman Williams) covenants to give the lessee uninterrupted possession. Freehold land under the operation of the registration of The Settled Land Act may be leased for any term not being less than twenty

The next type of lease is the financial lease. This lease does not include a maintenance fee and this type of lease is like a rent to own when the lease is paid in full the ownership is transferred to the organization.

However, the article by Milano (2012) also describes how operating leases can be an efficient and flexible way of leasing to many businesses. Leasing can be an advantage to a lot of successful companies if managed accurately. The lessee has a choice in the portion of the life of the asset they lease, meaning when that contract is up they can refresh the asset with a newer version which can lead to improved performance and reliability (Milano, 2012). These advantages can be received by both financing and operating leases, although the downfall of the operating lease is that the liability of the full cost of the asset is not recorded in their balance sheet, instead only the smaller cost of the annual expense is included. This could mean that an investor or owner taking on a company may not realise the large amount of expense that occurs from leasing an asset as the total liability cannot be seen.

19. None of the resources used by the business are subject to leases. Financial/operating leases would be an expense shown on the statement of comprehensive income and there is no such line item represented. The difference between a finance and operating lease is that a finance lease agreement is one in which all the risks and rewards of the asset are transferred to the person leasing the asset. With an operating lease, the risks and rewards of the asset are not transferred to the person leasing it.

Existing lease accounting standards require lessees to classify their lease contracts as either finance or operating leases. If a lease is classified as a finance lease, assets (and liabilities) are recognized in its statement of financial position. For an operating lease, the lessee simply recognizes lease payments as an expense over the lease term. This split into finance and operating leases has given rise to a number of problems.

In the case of the consumer wanting to lease or purchase an item of interest, there are a number of options for one to explore. With regards to leasing a property; residential or commercial real estate, the consumer has a few options to explore. One is called a contractual lease option. This type of agreement is made between the landlord (property owner) and the tenant who agrees that at the end of the contract term, he/she has the option to purchase the property of interest. Another type of agreement the consumer can take advantage of, is called rent to own, also called rental-purchase. This is a legal document made between the consumer and the business, under which tangible property is of interest; electronics, appliances, furniture,

Similar to a bond or loan, finance lease expenses are allocated between interest expense and principal value. In a statement of cash flows, part of the lease payments are reported under operating cash flow and part of