Response to Client Request I

Response to Client Request I

MEMORANDUM

TO: Sheila Smith, Supervisor

FROM: Paul Johnson

DATE: October 8, 2012

SUBJECT: FASB Research on Leasing

Trucking Company currently owns one hundred semi-trailers and can take advantage of an opportunity for growth if they are able to secure 20 more trailers. After researching the Financial Accounting Standards Board (FASB) website and other various resources, leasing 20 semi-trailers is a viable solution to the company’s problem. Leasing these assets will give Trucking Company the flexibility they need, considering this venture is with a new client and the length of the relationship is uncertain.

There are several advantages of leasing. One advantage is that a lease provides 100% financing for the lessee. This feature is beneficial to Trucking Company, as they will have other uses for their cash during this period of growth. Another advantage will be the flexibility it provides. The duration of the lease term can be for any period upon which the lessee and lessor agree. This can be for a short time, for instance, one month, to the entire economic life of the asset, which may be 20 years (Schroeder, Clark, & Cathey, 2011).

Every business decision has an element of risk. The structure of the lease will be crucial in mitigating this risk. According to the FASB ASC 840-10-25 (n.d.), there are currently two types of leasing options: capital lease and operating lease.

To classify accurately the lease at inception, consideration must be given to whether or not the lease agreement meets any of four criteria set forth by the FASB. In short, these criteria “are based on the assumption that a lease that transfers to the lessee the risks and benefits of using an asset should be recorded as an acquisition of a long-term asset” (Schroeder, Clark, & Cathey, 2011, pg. 433). In other words, if the lease is substantially a sale for the lessor and a purchase for the lessee, the lease is classified as a...