FASB Codification: A Case Study

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Abstract Regional trucking company has the opportunity to increase their business with a new customer if they have the capacity to run 120 trailers. Currently they have only 100 trailers and would need to purchase or lease an additional 20 trailers. To satisfy this requirement of the additional 20 trailers and how to structure the acquisition, a search of the FASB Codification has been done on direct financing, sales type, and operating leases. Lease Structure Issues According to FASB Codification 840-10-25-1 (Federal Accounting Standard Board, 2013), a lease is classified upon the inception of the lease as either a capital lease or an operating lease. Capital leases must meet one of the following four criteria: • Transfer of ownership must occur • A bargain price is set for the purchase of the asset at or near the end of the lease term • The terms of the lease must be for a period of time that covers 75% of the useful life of the asset •…show more content…
Currently they have only 100 trailers and would need to purchase or lease an additional 20 trailers. To satisfy this requirement of the additional 20 trailers and how to structure the acquisition, a search of the FASB Codification has been done on direct financing, sales type, and operating leases. This research has determined that leases are defined as either capital leases or operating leases. Capital leases must meet the FSAB criteria. Leases that does not meet one of the capital lease criteria is considered to be an operating lease. Both direct financing and sales type leases are considered capital leases. Because there is no guarantee how long the additional trailers will be needed, it is recommended an operating lease is entered into, and when further information is known on the length of the relationship with the new customer, the lease may be modified to a capital

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