DOI: 10.5176/2251-1997_AF18.21
Authors: Peter Harris
Abstract:
After decades of continuous controversy since the inception of FASB 13, involving the Off- Balance Sheet treatment of most leases, there has finally been a major change in Lease Accounting effective for the periods ending after December 15, 2018.The changes will be dramatic, and will require the capitalization of all non-cancellable leases whose terms are greater than one year in duration. The liability created by the lease contract will now become a balance sheet debt item, and will most likely have a major negative impact on a firm’s debt ratios and covenant agreements. Consequently, this change will greatly affect the way entities’ conduct business in the future. It will also have a major effect on financial statement presentations. This case study focuses on the differences in the treatment of leases between the current lease pronouncements and the upcoming new lease rules under US GAAP, and the impact of these differences on financial statements and selected financial ratios. Students will take GAAP financial statements under the present lease requirements and prepare a balance sheet, cash flow statement and income statement reflecting the new lease rules. This case study is suitable for use at both the undergraduate and graduate levels. It may be used in an Intermediate Accounting II, Accounting Theory, Financial Statement Analysis or an International Accounting class, as well as an Investment Finance course. The case can be offered as an individual case study or as a group project.
Keywords: US GAAP, IFRS, Capital Lease, Operating Lease, Financing Lease, Ratios.
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