While working on a consulting engagement, a supervisor in your team has given you an assignment. The client is a regional trucking company. A new customer has approached the client with an opportunity that would require 120 trailers more than the trucking company currently owns. The client is uncertain how long the relationship with the customer may last, but the deal has the potential for significant growth.
Your supervisor has asked you to research leases and lease structure issues on the Financial Accounting Standards Board (FASB) website, in particular the current practice and thought related to direct financing, sales type, and operating leases.
Address a memo to your supervisor that summarizes your FASB research results. Keep the memo brief while exploring the issues. Remember that both the client and the supervisor have limited time, and you want to make a good impression. Recommend an approach that the client can use to evaluate and capitalize on this opportunity.
In compliance with Brainmass rules, this is not an assignment or a report but only guidance. The summary of FASB research results are as follows. First, a lease is a contractual agreement between a lessor and a lessee (trucking company) that gives the trucking company the right to use specific property either owned by the lessor for a pre-determined period of time. From the perspective of accounting, a lease is either an operating or capital lease. In case the lease is an operating lease, there is no mention of the lease on the balance sheet; however, the amount paid is shown as an expense incurred.
Now let us consider the specific issues related to leasing. A direct financing lease refers to the leases where the collectability of minimum lease payments is assured and there are no important uncertainties that surround the amount of un-reimbursable costs yet to be incurred. The relevant FASB statements relating to direct financing are Statements No. 13, 66, and 91; In direct financing lease the trucking company leases trucks from a lessor that is not a manufacturer or a dealer.
When the lessor is a manufacturer or dealer, and the lease meets the criteria of a capital lease or direct financing it is sales-type lease.
Sales Type Lease is one in which at lease one or more criteria for capital lease is fulfilled and the collectability of ...
The requirements for this memorandum are discussed comprehensively in this solution, looking particularly at FASB results. 938 words with 3 references.