Client Regional Trucking

MEMO

Date: 01/17/2011

To: Team Supervisor

From: Team Consultant

Reference: Client - Regional Trucking Company

Subject: Research findings from FASB website on lease structure issues and recommendation to capitalize on new customer opportunity

An opportunity from a new customer that has potential for significant growth for our client is a welcome one. The uncertainty with how long the relationship with the new customer lasts is a concern. The economy is a lower point right now and without solid evidence that the economic future will get better, assurances are needed.

As you know, our client already owns 100 trailers and their present estimate shows that the new opportunity can be comfortably serviced by adding another 20 trailers to their current fleet. In the light of the above situation, your idea on leasing the additional trailers is appropriate. As desired, I researched the Financial Accounting Standards Board (FASB) website for their Statement of Financial Accounting Standards (SFAS) No. 13 that deals with Accounting of Leases. Based on the document, I give my findings and recommendations for an approach that our client can use to evaluate and capitalize on this opportunity.

The document SFAS No. 13 begins with the definitions of the terms used in leasing followed by classification of leases from the standpoint of the lessee and the lessor. From a lessee’s standpoint there are two types of leases: a) Capital leases and b) Operating leases (p. 7). From the lessor’s accounting perspective there are four types of leases: a) Sales-type leases, b) Direct financing leases, c) Leveraged leases, and d) Operating Leases (p. 8).

Capital leases are those that satisfy one or more of the four criteria mentioned as follows: 1) The lease agreement transfers title to the lessee at the end of the lease term, 2) The lessee has the option of buying the asset at a bargain price at the end of the lease term, 3) The lease term is equal to 75% or more...