Response to Client Request-Mamo

To:   Supervisor
From: Your Name
Date: February 1, 2010
RE: Response to Client Request – FASB Codification Summarized
The purpose of this memo is to clarify leasing issues in accordance with the Financial Accounting Standards Board (FASB) Codification and recommend an approach to dealing with the situation with your client. Specifically, I will outline current practices relating to direct financing, sales-type, and operating leases.
A lessee and a lessor shall consider whether a lease meets any of the following four criteria as part of classifying the lease at its inception under the guidance in the Accounting Financial Standards Board (FASB Codifications Website under the Lessees Subsection of this Section (for the lessee) and the Lessors Subsection of this Section (for the lessor):
• a. Transfer of ownership - The lease transfers ownership of the property to the lessee by the end of the lease term This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title.
• b. Bargain purchase option - The lease contains a bargain purchase option.
• c. Lease term - The lease term is equal to 75 percent or more of the estimated economic life of the lease property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease.
• d. Minimum lease payments - The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property...