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11 6: Lessee, Ltd Essay

533 words - 3 pages

1. Was the junior accountant’s analysis correct?

The junior accountant used these GAAP standards for lease accounting. This is evident based on his statement, “Since the equipment reverts back to Lessor Inc., it is an operating lease.” (Deloitte, 2010) However, this company is an established British Company which means that it applies IFRS rules and regulations for preparing their financial statements. Under the IFRS standards, the company has finance lease instead of an operating lease. So, in short, the junior accountant’s analysis was incorrect.

2. Was the senior accountant’s analysis correct?

Yes, the senior accountant is correct because he used the IFRS regulation standards. He classified this lease as a finance lease. ...view middle of the document...

” (Deloitte, 2010) He is obviously the senior accountant for a reason, he understood that he needed to follow IFRS regulations and standards.

3. How would the answer differ under U.S. GAAP?

As stated in the Master Glossary of the Codification, an operating lease can be defined two ways. “From the perspective of a lessee, any lease other than a capital lease and from the perspective of a lessor, a lease that meets the conditions in paragraph 840-10-25-43(d).” (FASB, n.d) Paragraph 840-10-25-43(d) states that a lease is an operating lease if it does not meet any of the four criteria below:

“The lease transfers ownership of the property to the lessee by the end of the lease term; the lease contains a bargain purchase option; the lease term is equal to 75 percent or more of the estimated economic life of the leased property; or the present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.” (FASB, n.d)
So, if this company was under U.S. GAAP standards, the junior accountant would then be right and the senior accountant would be wrong.
References:

Deloitte. (2010). Case 11-6: lessee ltd. Retrieved March 3rd, 2014, from
http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_11_6c_lessee_ltd_071513.pdf

FASB. (n.d.) Master glossary. Retrieved March 3rd, 2014, from
https://asc.fasb.org/glossary&letter=O

IAS 17. (n.d.). IAS 17-Leases. Retrieved March 3rd, 2014, from
http://www.iasplus.com/en-us/standards/ias/ias17

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