Business Discussion About Lease Activities (Business Info)

(Credit):

---written by thewriter197

---employed by Ashford University




Business Discussion About Lease Activities


     FASB, Financial Accounting Standard Board, will introduce new leasing rules that will affect companies worldwide (Burkholder, 2016). The companies will be required to accept new methods for accounting balance sheets and new methods for managing account activities (Burkholder, 2016). The main company types who will see change in accounting regulation are retailers, banks, airlines, and restaurants (Burkholder, 2016). Most of the balances on balance sheets are not accurately regulated. Most companies use broad estimates to record their finances from year to year. This normal regulation for accounting is expected to change in the year 2019. This is a huge problem for 85% of companies who use estimates instead of exact measurements. In 2019, the new accounting procedure will be initiated and all companies around the world will be required to follow it (Burkholder, 2016).

     The FASB is requiring companies to show their debt amount in exact increments to investors (Burkholder, 2016). This might scare away some investors. Some investors may not want to invest with a company that is drowning in large amounts of debt (Burkholder, 2016). The new rules is going to force some companies to go out of business due to precise business information being shown to investors.

     “Under current rules, companies are generally able to classify virtually all leases as operating leases and keep them off their balance sheets…..(Norris, 2013).” In other words, companies were allowed to leave certain transactions off the lease balance sheet. They could include what was necessary and leave certain payments off the books. They could write the balance statement for lease documents in the best way they could. They could use broad estimates to cover the expenses involved instead of exact measurements. The old lease policy gave multi-million corporations and small business owners more advantage.

     There are airplane companies who love to not record all their asset value on lease balance sheets. They want to get a cheaper price for using someone’s airplane. So, they will often bend the rules and leave out the real value of the asset they are using (Norris, 2013). They would leave out the asset cost of the planes to prevent the airline companies from having to pay the exact amount for credit (Norris, 2013). Credit they agreed to pay back on planes they borrowed from certain companies and countries. They wanted to prevent paying large amounts for credit on the initial agreement. The old policy will allow companies to lie about how much money they need to pay back to creditors for operating activities.

     The old policies created a loop hole that the FASB wanted to stop occurring. The FASB, wants to make sure all companies pay the amount they are owed. They do not want people to get a break. They also do not want people to lie about their loans or credit owed. If they owe an amount to certain individuals, they want that amount to be paid back in full. They need to change the accounting rules on the balance sheet to prevent people from paying less for something not planned (Norris, 2013).

The lease rules will require companies around the world to pay the amount in payments based on what the value of the asset is (Norris, 2013). They are required to pay that amount year to year. Payments will also be based on what was promised for the asset in the beginning of the lease purchase (Norris, 2013). Airline companies will no longer have the opportunity to lie about balances on lease statements. Equal liability payments must be made for each asset (Norris, 2013).

There are many companies who are not going to like the new rules being put in place for 2019. Most companies around today, would like to follow the old rules for balance sheets. Following the previous methods allowed companies to make estimates which gave companies an easier time to process payments. The new rules require companies to be accurate which is time consuming. Companies prefer estimates because estimates are fast and require less time to calculate for balance statements (Norris, 2013). However, FASB wanted to put a stop to companies lying about asset value to get cheaper payments (Norris, 2013).

      The new leasing rules will affect the cash flow statement, balance sheet, and income statement. Income statements were general estimated for rent payments in the past (2016). Some rent payments are excluded unless they come with a specific rate or specific index (2016). The rent payments will now have to be exact and calculated for each lease. The calculations and discounts will have to be included for each lease payment. This is connected to income because it requires leases to give the exact amount of what should be paid for a lease. So, this would mean that leases would need to be more constant and accurate. This would also mean that rent owners will not be allowed to change amounts out of the blue. Apartment complexes and condo owners have been know to change their rent fees in the middle of a lease. They have also been known to change the rules a lease before the lease has ended in the first place. Income statements would be more constant. The cash flow would also have to be more constant to keep up with new lease policies. If the cash flow for a business falls, then the leases will get terminated. This would indicate that payments have to be made on time or things will go downhill. There can no longer be estimates of what should be paid for rent. Things have to be paid exactly and precisely. The balance sheet, would have to show the exact amount. There can no longer be estimates for what is paid. Nobody, can escape the loop hole. Business must be accurate and record properly. It would prevent companies from changing fees on short notice. They would have to wait until the lease term is up.

     Airplane industries would be affected most by the new leasing policies (Norris, 2013). Airplane industries are struggling financial in terms of getting people to pay for vacation. They need the old policies to manage their plane costs. Now, They run a business that is based on people traveling to other places. Once people stop traveling, the airline companies will lose sales. The new policy is making airline companies make less money because profits are going down. Profits go down due to higher amounts of lease payments. They have to pay those payments to make sure that they have planes and other equipment. If they are unable to lie about asset value, then they have to pay more then what they pay now. The new leasing rules will affect airplane companies the most.

There is two new lease types classified under lease policies as A and B (Katz, 2016). For operating leases, they would be classified as Type B (Katz, 2016). Examples of Type B would include tractors, trucks, generators, printers, and other devices used for work operate purposes (Katz, 2016). For leases not related to operating, they would be classified as Type A (Katz, 2016). Examples of Type A, would include buildings, land, crops, machines that last 100 years, intangible assets, and other items that have a very long life (Katz, 2016). Calculations for these two types should not be a problem for most companies to follow. But, accurate calculations must be made and monitored correctly to ensure numbers add up for lease payments.

     The presence of the new balance sheets must reflect accurate financial statements. Companies have been using the old accounting policies for about 30 years(Katz, 2016). They will have to do some major calculations that was not originally required. Some companies are going to refer some items as personal computers to reduce the amount of lease payments needed to be paid for certain items used (Katz, 2016). Companies who refer to some items as personal to get rid of certain payment might be able to lower their lease amounts (Katz, 2016). However, only time will tell if the method of referring some equipment as personal will actually lower the cost of lease payments. All new balance statements will have to be accurate and reflect the right amount of data. No more estimates will be used for certain equipment.

     The new lease rules set be the FASB, will require the asset of something to be equal to the liability of the same thing (2016). “The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs (2016).” The leases will also have to use the new FASB dual model which requires the leases to be operating or finances. Assets and liabilities will be computed equally and be classed in a specific category. Based on new policy, estimates on what should be paid will not change what was agreed to be paid in the beginning. Lease payments will be equal to the asset of the product.

     Normally, the lease payments would go down after years due to “front-loading (2016).” Front-loading is when you lease something and the payments go down as time stretches. However, front-loading is no longer allowed with new accounting polices. The new accounting polices require companies the pay the equal amount of the asset. They can not pay a lower amount then the value of the asset. It doesn’t matter if it is operating or capital (Katz, 2016). They have to pay the equal amount of the asset. The lease will only go down if the asset leased goes down in asset value (2016).

Interest rates will be changed due to the new lease policy. The lease payments will be the expected value of the lease or asset (Norris, 2013). The rent will be based on an index  (Norris, 2013). Lease would be paid with a fixed rate plus percentage of sales (Norris, 2013). Value of the assets and liabilities will be updated every year (Norris, 2013). Initial value will be current level of index (Norris, 2013). In general, the interest rates will be included with sales for leases, but exact amounts of asset value must be included (Norris, 2013).

      At the end of each year, asset and liabilities will have to be updated. If the value of the asset changes, the value will have to be updated to by next year (Norris, 2013). The same applies for liabilities (Norris, 2013). Estimates can not be used. Exact payment amounts and equal amounts based on asset value must be used (Norris, 2013).

     The policies require some disclosures for the financial statements and balance sheets. Judgments made by management must provide extensive information on revenue and expenses (2016). Management can not make estimates for revenue and expenses (2016). Exact measurements and amounts must be recorded and reported (2016). Management is also expected to give precise information on contract finaces (2016). In short, people working for a company must give accurate information for lease expenses and revenue.

     Income tax statements will be the same as usual. The companies will have about three years to report their financial information to the accounting officials. This would indicate a high or lower tax return amount. It depends on the revenue and expenses with leases.

     FASB, is going to change the old leasing policies in the year 2019 (Burkholder, 2016). Companies have not been required to give exact estimates of their asset value in the past. New policies requires companies to give the asset value and pay the appropriate lease amount. Companies will no longer be able to lie about their assets to get cheaper lease payments. Value of assets and liabilities will have to be reported each year (2016). Airline companies will be hit the hardest with the change of lease rules. Airplane companies are based on traveling. When they have to pay more to travel people, they will take a big cut out of their payment. Payments for rent leases will have to be followed (2016). Rent owners will no longer be allowed to raise cost of a lease at any given time. Some companies are not happy with reporting exact leasing information. The old way of reporting lease information required estimates. This new policy requires calculations and must be reported year to year. Balance sheets can no longer be estimated or guessed. They have to recorded with accurate information. Will these new policies make the world a better place? Well, it will require people to pay the same fee constantly. That is the only thing that will change. But, it could start a path for people to work with better cash flow.









Reference:


(2018). Front Loaded Lease. WebFinance Inc.

Retrieved from URL: http://www.businessdictionary.com/definition/front-loaded-lease.html.

(2016, Feb. 25). The FASB Lease Accounting Standard Has Arrived. Retrieved from URL: https://www.pwc.com/us/en/cfodirect/publications/in-brief/fasb-lease-accounting-standard-asc842.html.

(2016, April 01). Evaluate the Tax Considerations of the New Lease Accounting Standard. Grant Thornton LLP. Retrieved from URL: https://www.grantthornton.com/library/articles/tax/2016/tax-considerations-of-new-lease-standard.aspx. 

Bell, Michael. (2018, March 27). FASB Accounting Overview for Corporate Real Estate. Retrieved from URL: https://visuallease.com/fasb-accounting-overview-for-corporate-real-estate/.

Burkholder, Steve. (2016, March 01). FASB Issues Lease Rules; Will Have Big Balance Sheet Impacts. The Bureau of National Affairs, Inc. Retrieved from URL: https://www.bna.com/fasb-issues-lease-n57982067931/.

Katz, M. David. (2016, Jan. 13).New Lease Standards May Demand Two Sets of Books.  Retrieved from URL: http://ww2.cfo.com/gaap-ifrs/2016/01/new-lease-standards-may-demand-two-sets-books/.

Norris, Floyd. (2013, May 16). New Accounting Proposal on Leasing Portends Big Changes. Retrieved from URL: https://dealbook.nytimes.com/2013/05/16/significant-changes-proposed-in-lease-accounting/.

Ryan, Deatrick. (2014, Nov. 24). Retrieved from URL: https://www.schneiderdowns.com/our-thoughts-on/construction/proposed-lease-standard-facing-congressional-opposition.

Tysiac, Ken. (2016, Jan. 13). IASB issues leases standard; FASB to follow. Association of International Certified Professional Accountants. Retrieved from URL: https://www.fm-magazine.com/news/2016/jan/iasb-issues-leases-standard-201613694.html?TestCookiesEnabled=redirect.