Accounting Foundations: Leases

Introduction

• The importance of lease accounting

1. The Economics of Leasing

• Understanding leasing vs. buying
• Different ways to finance assets
• User/Customer/Lessee: Pros and cons of a lease
• Owner/Seller/Lessor: Pros and cons of a lease

2. Lease Accounting: A Quick History Lesson

• The FASB four criteria from 1976
• Implementation of the FASB four criteria
• U.S. GAAP vs. IFRS
• Continuing calls for change

3. Operating Leases and Off-Balance Sheet Financing

• Leases within operating and finance structure
• Debt ratio and asset turnover ratio
• Implied value of assets used under operating lease contracts
• Adjusted debt ratio and asset turnover ratio
• Operating lease versus capital/finance lease

4. Operating Leases: Real Company Illustration

• Leasing example: Sir David Tweedie and airplanes
• The Gap: Debt ratio and asset turnover ratio
• The Gap: Estimated implied value of assets under lease contracts
• The Gap: Adjusted debt ratio and asset turnover ratio

5. Lease Accounting: The New Rule

• Will the new lease accounting rule end the world as we know it?
• Summary of the new lease accounting rule
• Simple numerical example of the new lease accounting rules

6. New Lease Accounting Rule: Transition Difficulties

• How long have you been teaching the old rules?
• A sample of impacts of the new lease accounting rule
• Renegotiating loan agreements
• Educating financial analysts and the business press
• How can I get around the new rule?

Conclusion

• Yes, financing should be on the balance sheet