Accounting, Finance, SPSS Essay: Lease Essay

LEASE ESSAY
Name Course Instructor Date
Question 1Define which leases are to be capitalized on the lessee’s balance sheet under IFRS 16. Explain how this is different from the criteria that was previously used in U.S. GAAP (see Wiley 2ed Chapter 21 and ASC 840). Also, explain which industries are most likely affected by this change and why.
Operating leases are now considered capitalized assets and are recorded in the balance sheet according to IFRS 16. This extends to operating leases that were considered “in-year” expense leases and recorded in the profit and loss account (Giner & Pardo, 2018). An operating lease is a contract, or part of a contract, which allows the use of an asset, but does not convey asset ownership rights. Under IFRS 16 all leases, operating leases are also capitalized and recorded just like the finance leases, regardless of whether finances or operations are treated in a similar manner. There is a focus on the “Right of Use" (ROU) where assets are recognized on the balance sheet if they are used to generate an economic benefit.
ASC 840 had four criteria to differentiate an operating lease from a capital lease. If there a is transfer of ownership or title of the asset the renter after lease term ends, there is a bargain purchase the lease life equal to or greater than 75 percent of the remaining asset’s economic life, and present value (PV) of the of the lease payments is 90% or more of the fair market value (Munter, 2018). If a lease does not meet any of the criteria it is an operating lease. Under US GAAP, operating leases are treated as operating expenses and are not capitalized
The retail, telecommunications and airline sectors are some of the most likely to be affected. The retail industry leases properties and retail spaces in the US more often compared to other sectors, and for companies reporting under the standards are required to capitalize almost all leases except the short-term and low-value asset leases. Retail companies would report more liabilities in the balance sheet to reflect the changes. In the aviation industry, off-balance leases are co...