Lease Structure and Lease Issues
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- Date Submitted: 05/09/2010 12:40 PM
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Memorandum
To: supervisor
From: Oksana Panarina
Date: April 5, 2010
Subject: Lease Structure and Lease Issues
Our client’s company currently owns 100 trailers, customer requires 120 trailers for its project, which is 20 more trailers than the company owned. The relationship with the customer is uncertain but at the same time it has potential for significant growth of client’s company. On the other hand, future relationship with the customer may affect the financial position of client’s company. The additional trailers can be obtained through the capital lease or operating lease. But in considering type of lease for the trailers client’s company should understand lease structure and lease structure issues in the FASB.
In order to get the benefits of lease the lease transaction should be structured according to the SFAS No. 13, No. 13,“Accounting for Leases.” There are different types of lease structures, which can be used by client’s company and the customer in making a lease agreement. In SFAS No. 13, the FASB outlined specific criteria to help classify leases as either capital or operating leases. We need to define if this lease will meet one of following four criteria. If so, the lease should be classified as a capital lease. If it will not meet any of listed criteria, then lease should be classified as an operating lease.
1. The lease transfers ownership of the property to the lessee by the end of the lease term. This includes the fixed noncancelable term of the lease plus various specified renewal options and periods.
2. The lease contains a bargain purchase option. This means that the stated purchase price is sufficiently lower than the expected fair market value of the property at the date the option becomes exercisable and that exercise of the option appears, at the inception of the lease, to be reasonably assured.
3. The lease term is equal to 75 % or more of the estimated remaining economic life of the leased property, unless the...
To: supervisor
From: Oksana Panarina
Date: April 5, 2010
Subject: Lease Structure and Lease Issues
Our client’s company currently owns 100 trailers, customer requires 120 trailers for its project, which is 20 more trailers than the company owned. The relationship with the customer is uncertain but at the same time it has potential for significant growth of client’s company. On the other hand, future relationship with the customer may affect the financial position of client’s company. The additional trailers can be obtained through the capital lease or operating lease. But in considering type of lease for the trailers client’s company should understand lease structure and lease structure issues in the FASB.
In order to get the benefits of lease the lease transaction should be structured according to the SFAS No. 13, No. 13,“Accounting for Leases.” There are different types of lease structures, which can be used by client’s company and the customer in making a lease agreement. In SFAS No. 13, the FASB outlined specific criteria to help classify leases as either capital or operating leases. We need to define if this lease will meet one of following four criteria. If so, the lease should be classified as a capital lease. If it will not meet any of listed criteria, then lease should be classified as an operating lease.
1. The lease transfers ownership of the property to the lessee by the end of the lease term. This includes the fixed noncancelable term of the lease plus various specified renewal options and periods.
2. The lease contains a bargain purchase option. This means that the stated purchase price is sufficiently lower than the expected fair market value of the property at the date the option becomes exercisable and that exercise of the option appears, at the inception of the lease, to be reasonably assured.
3. The lease term is equal to 75 % or more of the estimated remaining economic life of the leased property, unless the...