Accounting for Leases: Fundamental Principles, written by Joseph P. Sebik, C.P.A., and Lisa Marie Starczewski, Esq., the first in a three-part series, surveys the complex lease accounting rules that affect both lessees and lessors. It discusses the background of lease accounting and financial reporting rules, the outlook for short and long-term lease accounting trends, and the current state of the lease accounting rules. 

This Portfolio surveys the distinctly different accounting treatments followed by lessees and lessors and examines how the accounting treatment provides substantially different reporting results, often as a result of minor structural changes in a lease.   

As a result of the headline investigations of accounting improprieties at Enron Corporation and other companies, which  revealed that some companies had exploited GAAP for leasing to achieve suspect “off-balance sheet” results, this Portfolio also explains changes made to the rules and the affect they have had on the structuring of complex, post-Enron leasing transactions. 

In addition, this Portfolio looks at the structures of leases themselves—from single-investor structures to leveraged leases to synthetic leases—and examines special considerations related to terms and conditions. 

Accounting for Leases: Fundamental Principles takes a lessee’s perspective, discussing general accounting treatment of capital leases and lease provisions, specific reporting requirements, and disclosure requirements.  It then reviews accounting for leases from a lessor’s perspective, examining the accounting treatment and disclosure requirements for operating leases, direct financing leases, sales-type leases, and leveraged leases. 

Working papers provided in this Portfolio include a summary of differences between IAS and U.S. GAAP Lease Accounting and numerous samples: a sample master lease purchase agreement, sample synthetic lease, sample residual value curve for rail cars, and sample disclosures of accounting for leases by selected public companies. 

Accounting for Leases: Fundamental Principles allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Introduction and Perspectives

A. Nature and Significance of Leasing

B. Continuing Evolution of Lease Accounting Rules

C. Focus of Portfolio

D. Recent Developments and the Future

E. Scope of Portfolio

II. Current State of Lease Accounting

Introductory Material

A. Basic Economics of Leasing

B. The Development of Lease Accounting Rules

C. Market Responses to Foundational Accounting and Tax Rules

D. The "Spark of Change"

E. The Effect of Accounting Scandals and Sarbanes-Oxley on Lease Structures

1. In General

2. Sarbanes-Oxley

a. Mandatory Certification of Financial Statements

b. Creation of the Public Company Accounting Oversight Board

c. Mandatory Disclosure of Off-Balance Sheet Transactions

d. Summary

3. 2005 SEC Reports Mandated by Sarbanes-Oxley

F. Transparency and Consistency

1. In General

2. The "Off-Balance Sheet" Issue

a. Background

b. Common Misconceptions

c. Bright Line Rules

G. Lease Accounting Trends

1. Short-Term Trends

a. Diminished Demand for Large, Structured Synthetic Leases

b. Elimination of LILOs and SILOs

c. Cooperation and Conservatism Among "Big 4" Accounting Firms

d. Economic Justification, Appropriateness, and Disclosures

e. Structural Changes

f. Reevaluation of Selected Practices

(1) Real Estate Rent Holidays During Construction Periods

(2) Build-to-Suit (Lessor)

(3) Residual Value Insurance on Multiple Assets

2. Long-Term Trends

a. Synchronizing U.S. GAAP and International Accounting Standards

b. The "New Approach" to Lease Accounting

III. Definition and Classification of Leases

Introductory Material

A. Summary and Overview

B. Characterization of Leases - Commercial Law

C. Characterization of Leases - Tax Law

1. In General

2. Leveraged Leases

3. TRAC Leases

4. Conditional Sale

5. First Amendment Lease

D. Classification of Leases - Accounting

1. In General

2. Accounting Classifications Summarized

3. "Leases" Subject to FAS 13

a. Definition of "Lease" in FAS 13

b. Determining When an Arrangement Contains a Lease Subject to FAS 13

c. Software Arrangements That Include Leases

E. Definition of Terms

1. Related Parties

2. Inception of a Lease

3. Fair Value of the Leased Property

4. Bargain Purchase Option

5. Bargain Renewal Option

6. Lease Term

7. Estimated Economic Life of Leased Property

8. Estimated Residual Value of Leased Property

9. Unguaranteed Residual Value

10. Minimum Lease Payments

11. Interest Rate Implicit in the Lease

12. Lessee's Incremental Borrowing Rate

13. Initial Direct Costs

14. Contingent Rentals

15. Penalty

F. FAS 13 Classification Tests

1. Classification by the Lessee

2. Classification by the Lessor

a. In General

b. Sales-Type Leases

c. Direct Financing Leases

d. Leveraged Leases

e. Operating Leases

f. Summary of Lessor Classification Rules

G. Leases Involving Real Estate

H. Leases Between Related Parties

I. Sale/Assignment of Lease or Leased Property to Third Party

J. Effect of Lease Changes on Classification

IV. Structures of Leases

Introductory Material

A. In General

B. Single Investor Structure

1. Description

2. Examples

C. Participation

D. Tranched Participation

E. Syndication

F. Underwritten Lease Transaction

G. Best-Efforts Participation or Syndication

H. Club Syndication

I. Leveraged Lease

J. Credit-Tenant Leases

K. Synthetic Leases

1. Description

2. Example

L. Use of SPEs in Lease Structures

1. In General

2. FIN 46R - The Basics

3. General Effect of FIN 46R on Leasing

M. Considerations Related to Terms and Conditions

1. General Descriptions of Assets Subject to Lease

2. Lease Versus Service Contract

3. Hell and High-Water Clause

4. Right to Quiet Enjoyment

5. Maintenance Conditions

6. Asset Upgrades and Improvements

7. Asset Substitutions

8. Cancellation for Obsolescence

9. All-or-None Return Conditions

V. Accounting for Leases From the Lessee's Perspective

A. In General

B. Capital Leases

1. General Accounting Treatment

2. Examples

3. Specific Reporting Requirements

4. Effect of Changes in the Lease Provisions

C. Operating Lease

1. General Accounting Treatment

2. Examples

D. Disclosure Requirements

1. In General

2. FIN 45 Disclosure Requirements

VI. Accounting for Leases From the Lessor's Perspective

A. In General

B. Operating Lease

C. Direct Financing Lease

D. Sales-Type Lease

1. In General

2. General Accounting Treatment

3. Amendments, Renewals, and Extensions of Sales-Type Leases

E. Leveraged Lease

1. In General

2. General Accounting Treatment

F. Disclosure Requirements

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Principal Acronyms Used in This Portfolio

Worksheet 2 Hierarchy of U.S. Generally Accepted Accounting Principles

Worksheet 3 Context of Lease Accounting Rules in the GAAP and GAAS

Worksheet 4 Definition - Off-Balance Sheet

Worksheet 5 Summary of Differences - IAS vs. U.S. GAAP Lease Accounting

Worksheet 6 Sample - Master Lease Purchase Agreement

Worksheet 7 Sample - Synthetic Lease

Worksheet 8 IBM Global Finance Lease Offerings

Worksheet 9 Sample Residual Value Curve for Rail Cars

Worksheet 10 Sample Disclosures of Accounting for Leases By Selected Public Companies

Worksheet 11 FSP 13-2 AMENDMENTS OF FAS 13

Worksheet 12 List of Significant Accounting Pronouncements Principally Discussed

Bibliography

UNOFFICIAL

American Institute of Public Accountants:

Financial Accounting Standards Board:

Emerging Issues Task Force:

International Accounting Standards

Accounting Textbooks, Handbooks, Articles, and Speeches:

Miscellaneous: