When there is a transfer in a lease, all benefits along with risk are transferred to the lessee and will be capitalized by the lessee as well. b. How should Lani account for this lease at its inception and determine the amount to be recorded? Lani should account for the lease from the beginning as an asset and the obligation to equal the current value towards the beginning of the term at minimum payment during the term. When the amount goes over the fair value of the lease the amount should be documented as an asset.
Traditionally under U. S. GAAP, businesses distinguished between operating and capital/finance leases. If a lease agreement met one or more of a classification criterion it would be considered a capital lease. The criterion includes, a title transfer, a bargain purchase option, a lease term of 75% or more of expected life, and present value of the minimum payments greater than or equal to 90% of the future value of the asset. However, the proposed IFRS standards eliminate operating leases. “Under the proposed model, all leases are essentially treated the same for lessees and in a manner more akin to the traditional capital/finance lease mode” (Deloitte, 2011).
Case Study Summarize the major lease accounting provisions under IFRS, focusing on the classification criteria (finance vs. operating leases). Under the IFRS accounting for leases depends on whether it is a financing or operating lease. The operating lease it required the lessor has the leased assets recorded on the balance sheet. While under the finance lease are accounted for as a financing transaction under the IFRS. The categorization of every lease will not depend on whether a company, bank or person to have legal ownership of the asset, it would depend only if the third party considerably has all the risk and rewards of the ownership.
Revenue Recognition in Construction Industry According to IAS 18, Revenue is defined as: “The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants” (Melville, 2011). Thus, it is clear that revenue arises from ordinary activities, that in excludes borrowings and amounts contributed by Shareholders. Furthermore, IAS 11 deals with Construction Contracts. It states that “A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use” (IFRS, 2013). IAS 11 instructs that revenue from a Construction Contract will be recognized if can be estimated reliably.
Loyalty points program PDL operates a loyalty points program, which will impact on the measurement of sales revenue, important for analysts. Currently, a sale transaction with point value attached is recognized as a sale entirely in the current period. An expense and liability for the expected cost – not sales value – of goods to be redeemed in the future is recognized in the same time period as the sale. This policy maximizes the sales value recorded with the initial transaction. It does not reflect the substance of the transaction, though, which is that PDL has rendered multiple deliverables in sale: both the initial sale, and the subsequent sale based on points value are being sold.
The revenue principle works on the basis that companies must recognize revenues in the accounting period in which revenue is earned. The matching principle on the other hand allows expenses to follow revenues and by doing this, expenses are matched with revenues in the period when efforts were expended to generate revenues. Another key concept in commercial accounting is, knowing the difference between accrual and cash basis accounting. Accrual basis accounting means that, “transactions that change a company’s financial statements are recorded in the periods in which the events occur, even if cash was not exchanged”. (Kimmel, 164).
The disclosure shows the loss contingency and states the estimate of loss. Before the company issues the financial statement and after the enterprise’s financial statement is done, the company can impair an asset or incur the liability. Disclosure of loss contingencies helps the company to keep its financial statements not being misleading. When the disclosure is necessary, the company must report the loss contingency in financial statements with a given estimate of the mount of loss. Reference Financial Accounting Standards Board (2010).Statement of Financial Accounting Standards No.
Positive covenants specify an action that the company agrees to take or a condition the company must abide by. An example would be agreeing to maintain its working capital at a minimum level. 2) Repurchase debt. A firm can eliminate the costs of bankruptcy by eliminating debt from its capital structure. 3) Consolidate debt.
Variable costs on a per unit basis remain constant. Feedback The correct answer is: Variable costs on a per unit basis remain constant. Cost behavior patterns refer to how fixed and variable costs react to changes in business activity levels. For variable costs, the unit cost remains constant while the total cost changes with increases or decreases in activity. Question 2 of 100 (2B5-LS53) Flag for Review A manufacturer with seasonal sales would be most likely to obtain which one of the following types of loans from a commercial bank to finance the need for a fixed amount of additional capital during the busy season?
Financing decisions firm must routinely make The Equilibrium Theory argues that the value of the leveraged value of a company depends on the un-levered (full equity) value of the firm, plus the present value of the tax shield minus the present value of the distress costs. The present values of tax shield and the distress costs vary with different levels of debt. Debt does not affect the un-levered value of the firm due to the fact that debt finance does not affect the operating risk of the company, however, it does affect the financial risk. As the leverage increases, the expected return from equity holders also augments along with risk. These effects cancel out making the shareholder value unmoved.