Response to Client I

Response to Client Request I

ACC/541

February 6, 2012

Response to Client Request I

Dear Sir;

Per your request I have researched leases and lease structure issues on the FASB website for our client. My research includes the current practice and thought related to direct financing, sales type, and operating leases in order to give our client a better understanding of the lease accounting process so that they can make a sound decision with regard to their new business opportunity.

It appears that our client’s new business opportunity could lead to the long term need for trailers and they may wish to consider a direct financing lease or a sales type lease so that at some point they will be able to have ownership of the trailers should the growth in business continue. Under FASB ASC 840-10-25-29 if at its inception a lease meets any of the four lease classification criteria in paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease (FASB Accounting Standards Codification, n.d.).

Under FASB ASC 840-10-25-1 a lease that meets one of the following four criteria will be considered a capital lease. There will be a transfer of ownership to the lessee at the end of the lease, the lease contains a bargain purchase option, the lease term is equal to 75 percent or more of the estimated economic life of the leased property, or the present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor (FASB Accounting Standards Codification, n.d.).

If our client chooses to enter into either form of capital lease FASB ASC 840-30-50-1 requires the following to be disclosed in their financial statements or footnotes. The gross amount of assets recorded under capital leases, future minimum lease payments, and the...