GCU ACC 502 Topic 5 DQ 2

Topic 5 DQ 2

The new principles regarding lease accounting were issued by the Financial Accounting Standards Board (FASB) on January 1, 2011. The new lease accounting guidance is intended to help public companies make better decisions about their operating leases.

The two main differences between finance and operating leases under these new lease provisions are:

1. The current GAAP standard requires a lessee to record a liability for the right-to-use the leased asset and a corresponding right-to-use asset upon signing an operating lease. Under the new standard, these fair value estimates are eliminated. Additionally, the current GAAP standard requires disclosure of executory costs that relate to being obligated under an operating lease, (Spiceland et al., 2018). Under the new guidance, disclosure of executory costs is limited to those that are incremental and directly attributable to negotiating a lease.
2. Under the current GAAP standard, a lessee is permitted to make an irrevocable election to continue applying existing GAAP standards after the effective date of the new guidance. Under the new guidance, leases with a term of 12 months or less receive recognition and measurement under current GAAP. Long-term operating (or finance) leases continue to be accounted for using the new guidance for all periods presented.

In regard to a public traded company, Coca-Cola is an example of a company that uses both financing and operating lease agreements. In its 2014 annual report, the following disclosures were located: Coca-Cola has entered into leases for manufacturing facilities, equipment, land and buildings worldwide, (Billing, 2018). Coca Cola leases administrative offices worldwide primarily through short-term operating leases. The terms of these leases range from 1 to 5 years.

The lease agreements generally have a minimum lease term of 3 years and include options to extend the lease term into subsequent years. The contracts require Coca Cola to pay base rent, incremental rent, and/or tenant improvement allowances as well as various other trade, tax and other costs, (Graham et al., 2018). Cost sharing arrangements for operating leases may include an allocated portion of the base rent that is allocated among all lessees on a proportional basis or may be based on an individualized rental amount for each lessee.

References

Billing, M. (2018). New rules, new strategies: How the changes to lease accounting rules impact leasing decisions. Corporate Real Estate Journal.

Graham, R. C., & Lin, K. C. (2018). How will the new lease accounting standard affect the relevance of lease asset accounting?. Advances in accounting, 42, 83-95.

Spiceland, C., Spiceland, D., & Njoroge, P. K. (2018). Tourist Trap: The new lease accounting standard and debt covenants. Journal of Accounting Education, 45, 45-59.