Accounting for Leases

Abstract

The increased use of the lease transaction to acquire the services of long term assets has precipitated much discussion. At first, this was directed at the financial statements of lessees. Research Study No. 4 reviewed this aspect of lease presentation at some length,' and Principles Board Opinion (APBO) No. 5 made it clear that disclosure of the essential terms of long-term lease agreements in the reports of the lessee was required if the amounts were material.2 This opinion stated that in those cases where the transactions were essentially equivalent to installment purchases of property.... The property and the obligation be stated in the balance sheet at an appropriate discounted amount of future payments under the lease agreement.... The method of amortizing the amount of the asset to income should be chosen without reference to the period over which the related obligation is discharged. In APBO No. 7, Accounting for Leases in Financial Statements of Lessors, 3 the issue of amortization is given more attention. it is stated, There are two predominant methods in general use for allocating rental revenue and expenses over the accounting periods covered by a lease. These may be termed the 'financing' and the 'operating' methods. Under the financing method, the excess of aggregate rentals over the cost of property on the books of the lessor is viewed as compensation for the use of funds.