Paper

Response to Client Request I

ACC/547

September 21, 2010

Memo

To: Supervisor

From:

CC:

Date: October 9, 2010

Re: Trailer Leasing Options

This communications purpose is to address leasing options available for the Regional Trucking Company. As you know they require 120 trailers, which are 20 more than the company currently has. Also taking into consideration potential for growth but also the uncertainty of how long the relationship with the customer may last. After my review of the Financial Accounting Standards Board (FASB) website, I do have information covering sales types, operating issues, and direct financing.

Direct financing leases are when interest is the lessor’s only revenue generated. Basically a bank or any type of financial institution buys the asset. In this case it would be the trucks and then the lease would be extended to the Regional Trucking Company. This is an alternative to actually borrowing the funds for the purchase of the trucks.   The direct financing is essentially a loan.

A lease must meet one of the four criteria listed below stated by the FASB ASC 840-10-25-1 or is considered an operating lease.

➢ There has to be a transfer of ownership to the lessee by the end of the lease term

➢ The lease contains a bargain purchase option

➢ The lease term is equal to 75% or more of the estimated economic life of the leased property

➢ The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the excess of the fair value of the leased property.   If any of the four criteria is met and also meets both of these criteria’s in that the lease payments have to be reasonable and the costs to be incurred are also predictable the lease is considered to be either direct financing or sales-type (FASB Accounting Standards Codification, n.d.)