The principles regarding leases were recently updated by FASB, as discussed in the textbook. Explain two main differences between finance and operating leases under these new lease provisions.
Select a publicly traded company and access its most recent financial statements, form 10-K. Include the name of the company in your subject line, and do not choose a company about which one of your classmates has already posted. Navigate to the notes to the financial statements and locate the company’s note on lease disclosures. Identify if the company has operating leases, financing leases, or both. Explain how you can tell which type of leases the company utilizes. Is the company properly reporting leases using the new standard? How can you tell? Participate in follow-up discussions by comparing the lease reporting of your company to that of a classmate’s company and comment on any similarities or differences between the companies.
Expert Solution Preview
The two main differences between finance and operating leases under the new lease provisions by FASB are as follows:
1. Recognition of Lease Obligations: Under the new standard, both finance and operating leases are recognized on the balance sheet as lease liabilities and right-of-use assets. Previously, only finance leases were recognized on the balance sheet, while operating leases were accounted for off-balance sheet. This change brings greater transparency and enhances the comparability of financial statements.
2. Expense Recognition: Finance leases result in higher expense recognition during the earlier years of the lease term, as both interest expense and amortization of the lease liability are recorded separately. Operating leases, on the other hand, result in a straight-line expense recognition over the lease term, reflecting a more equal distribution of lease costs.
In order to determine the type of leases a company utilizes, we need to examine the company’s notes to the financial statements, specifically the note on lease disclosures. This note provides information about the company’s lease agreements, including the nature of the leases and the key terms.
To identify whether a company has operating leases, financing leases, or both, we can look for specific indicators in the lease disclosures. This may include details about the lease term, lease payments, purchase options, and residual value guarantees. By analyzing these factors, we can determine the classification of the leases.
To assess whether a company is properly reporting leases using the new standard, we need to examine whether the company has recognized lease liabilities and right-of-use assets on the balance sheet for both finance and operating leases. Additionally, we should review the company’s disclosures related to lease expenses, lease terms, and any other relevant information required by the new lease standard. By comparing the company’s reporting to the requirements of the new standard, we can determine if the company is in compliance.
Participating in follow-up discussions with classmates allows us to compare the lease reporting of different companies. We can identify similarities and differences in how companies have adopted and applied the new lease standard. This provides insights into industry practices and further enriches our understanding of lease accounting under the new provisions.