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June 2013 » Proposed Changes to Lease Accounting...
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Mark E. Riley, PhD, CPA (Tex.), and Rebecca Toppe Shortridge, PhD, CPA (Ind.; inactive)
Despite the extensive rules that govern lease accounting, financial statement users often criticize the “bright-line” rules in existing standards for differentiating capital leases from operating leases. The primary criticism stems from the fact that current standards allow companies to structure leases to suit their financial reporting preferences; thus, companies frequently engage in complicated arrangements involving third-party guarantors in order to avoid reporting lease agreements as capital leases (i.e., to avoid recognizing the asset and the related liability in their financial statements). These rules permit companies to develop to leasing arrangements that cover multiple years with no balance-sheet recognition; thus companies widely utilize leases as a mechanism for off–balance sheet financing. In addition, comparability suffers because companies use varying accounting treatments for economically similar lease transactions.
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