Response to Client Request I

Response to Client Request I

ACC541

December 6, 2010

To: Supervisor

From: Team B

Date: December 6, 2010

Subject: Lease Structure & Lease Issues

The company’s client, a trucking company, currently has 100 trailers. However, a new project requires the client to have 120 trailers. The relationship on the project is uncertain, which may affect the financial position of the client. The additional trailers needed for this project can be obtained through a lease option or by direct financing. In making the decision for a lease structure, the client needs to understand more about lease structure and issues with the FASB Codification.

To get the benefits of lease the lease transaction should be structured according to the SFAS no. 98, which deals with the lease structure related to the transactions integral equipment and real estate. The SFAS no. 5 and 6 also describes the terms and conditions for lease transactions. Different types of lease structures exist, which can be used by the client company and the customer in making a lease agreement; these are as below –

Sales Type Lease

Under sales type lease, the lessee assumes all of the benefits and risks of ownership. The fair value and carrying value of the lease is different. According to Schroeder, Clark, & Cathey (2005), if a lease meets any of the four criteria set, plus both of the following criteria, then the lease should be a capital lease.

“1. Collectibility of the minimum lease payments is reasonably predictable.”

“2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease.”

These two criteria are required in the FASB codification.

Direct Financing Lease

Under direct financing lease, the lessee assumes all of the benefits and risks of ownership. The fair value of the lease is equal to its carrying value (Bragg, 2004, 301-304). This lease structure should meet the additional two criteria...