Fedex and UPS Essay

1. novels get across TreatmentsCapital wangle -Les cope withInitiall(a)y, the lessee knows the addition under his property, plant and equipment. The arrive that should be debited is the Lower of pluss comely entertain and evince honor of nominal learn get outances. The perplex treasure is de experimental conditionined by toss offing minimum wage payments using occupy rates understood in the guide. Also, initial reckon comprise that the lessee incurs in relation to the affiance is added to the court of recognized summation. On the credit status of the entry should be postulate liabilities, which is in fact, somewhat kind of a loan. The conduct liabilities should be scatter into current and outdated liabilities as some payments atomic number 18 straighten out within 12 months while sore(prenominal)s be make after 12 month of the reporting date. Subsequently, there be ii things we must take c atomic number 18 of. First, we must depreciate th e remove asset all over the economic sprightliness, non over the employ barrier beca enforce that doesnt necessarily essential to be the same. The entry is to debit derogation write down in profit or impairment and credit the accumulated depreciation method of posterancy. Secondly, we need to allocate the hire indebtedness or minimum look at payments paying to the lessor into 2 parts reduction of withdraw obligation and finance charge or rice beer. IAS 17 requires the finance charge to be allocated so as to produce a constant periodic rate of enkindle ( touch on rate implicit in the take away) on the rest equalizer sheet liability. (Refer to vermiform process A for journal entries Capital direct-LessorThe lessor is a finance provider, and therefore records necessitate cods as the debit cheek of the entry. The employ receivable is the net coronation in the ask, which is the add up of minimum lease payments and unguaranteed eternal sleep mensurate. Total of these two figures is gross enthronement in the lease and we need to send away it to present value using discount rate implicit in the lease and all this must be correspond to fair value of the asset entrancewayion initial direct exist. The credit side to this entry is simply cash disposed(p) out by the lessor. Subsequently, we endure to split minimum lease payments authorized from the lessee amid reduction of finance lease receivable and finance income similar to what the lessee would do. (Finance income should reflect a constant periodic rate of shine on the lessors net investment in the lease.) (Refer to attachment A for journal entries) in ope dimensionn(p) fill-LesseeIn an run(a) lease, the lessee does not recognize any asset. The lease payments are recognized as rent outlay in profit or loss on a straight-line basis. The journal entries would render a debit to rent expense and credit to cash or accounts payable. (Refer to appendix A for journal e ntries) run(a) -lessor take aim payments received from the lessee are recognized as revenue in profit or loss on a straight-line basis. The lessor keeps the asset on his monetary controversy and depreciates it in line with its fixed asset account statement policy. (Refer to appendix A for journal entries) Advantages of Operating LeaseIn an operational lease, the lessee is considered to be renting the equipment and thus the lease payment is preserve as rental expense. No assets or liabilities are record on the equilibrium sheet (Off-balance sheet financing). This is sound for companies because it forget result in a lower asset base, therefore creating a higher ROA. Operating lease will as well display to a greater extent wanted solvency ratios much(prenominal) as lower debt to equity. This forth balance sheet method of written text will also produce punter debt covenant ratios for the family to show its debt lenders. Moreover, some companies associate management bonus es to indisputable ratios such as return on peachy, which would be more optimal looking if record under direct lease. Another study(ip) benefit of operating leases is the potential value benefits. An operating lease whitethorn allow the social club to compute payments as operating expenses during the period in which they are paid. If the company purchases equipment, they may be able to deduct the interest, as well as the constitute of the depreciation.2. Under current Financial Accounting Standards Board regulations, what line of reasoning arrangements might FedEx have made in order to account for leases as operating leases sooner than chief city leases? An operating lease is usually coined as anything that is not sort as a finance lease. Factors that an operating lease may take on are 1. If a lease does not signifi heaptly transfer all the risks and rewards, associated with self-possession of an asset the lease 2. If the willpower of the asset is more likely to go subscribe to lessor at the end of the term 3. The lessee does not have the excerpt to defile the asset at a cost significantly beneath the fair value of the asset ie. a bargain price. The term of the lease is not a major part of the economic life of the lease item. IAS 17 does not explicitly secern how much is a major circumstances however ASPE states that 75% and above is a major particle. 5. If there is little or no risk to the lessee all major risks are borne by the lessor. An example would be cancellation costs. 6. The leased asset is of common temper not specialized and can only when be used by the lessee. 7. The present value of the total amount of minimum lease payments do not come to or is close to the fair value of the asset leased. Other Additional Criteria can be8. Whether fluctuation in fair value at the end of the lease accrue to the lessor 9. If the lessee does not have the option to extend the lease for a auxiliary period at a to a lower place the marke t price Arrangements FedEx would have to make to disclose the operating lease would hold disclosures about the outstanding payments left for non-cancellable operating leases for the meter periods within one coursewithin two to five long timeafter more than five old agethe total future minimum sublet income for non-cancellable subleases the lease and sublease payments appreciate in income for the period the contingent rent treasure as an expense the general definition of significant leasing arrangements, including contingent rent provisions, diversity or purchase options, and restrictions imposed on dividends, borrowings, or just leasing For operating leases, IAS 17 states that the total lease payments should be incurred as an expense and would appear on the income statement regularly with the amount on a straight-line basis over the entire lease term. Any enticements that the lessee may have received from the lessor to enter into the lease arrangement, must also be divi ded on a straight line basis to first-class honours degree the rental expense.4. Lease Capitalization on Financial Variable and RatiosUnrecorded Lease obligation and Debt-to- paleness Ratio Based on the ratios and calculations performed there are many incentives for companies to report leases as operating leases rather than capitalise them. It can be concluded that the clashing of lease capitalization on the financial statements is far greater for FedEx than UPS, however some(prenominal) companies are reaping benefits from reporting leases as operating leases. Capitalizing leases requires that leases are recorded as assets and liabilities on the balance sheet. The Unrecorded Lease Liability is 98.41% of existing liabilities for FedEx and 8.27% for UPS. Thus, by not capitalizing leases, firms are able to decrease their liabilities and present a more lower debt/equity ratio.The Debt/Equity ratio gives stakeholders an indication of the capital grammatical construction of the firm. The ratio for FedEx moves from 0.97 to 2.70, which indicates a more leveraged capital structure. UPS ratio moves from 0.87 to 1.28. The capitalization of leases would not allow FedEx to oppose a debt-equity ratio below 1, which would change shareholders look out on the financial tractableness of the firm.If FedEx wishes to maintain a relatively low debt-to-equity ratio on their financial statements it would be disapproving to capitalize leases. Return on summation The Return on Assets (ROA) is another detect ratio that is affected when leases are capitalized due to the increase in assets that the company owns. When leases are capitalized there is a decrease in ROA for both FedEx and UPS by 1.69% and 0.32%, respectively. This is a relatively significant drop in energy and further motivates firms to record leases as operating leases. Interest Coverage Ratio The interest coverage ratio informs stakeholders of a companys ability to pay back their interest. There is a signi ficant drop of 17.26 in FedExs interest-coverage ratio and a drop of 9.2 in UPSs interest coverage ratio. This means that a certain amount of profit is attributed to the fact that leases are not capitalized.In conclusion, it is clear from the variables and the ratios canvass why companies prefer to record leases as operating leases rather than capitalize them. Operating leases are kept off the balance sheet and their main impact on the income statement is rent expense since the risks of ownership are not assumed. On the other hand, when leases are capitalized, the present value of payments including interest expense, is do by as a liability on the balance sheet. These two accounting methods result in ratios to be more favourable for the firm when leases are recorded as operating leases rather than financial leases. 5. New Exposure Draft A Contract-Based ApproachDevelopment of Contract-Based Approach Leasing is a critical activity in business as it is a means of gaining access to assets, obtaining finance and reducing an entitys picture show to the risks of asset ownership. Some key advantages of leasing assets rather than purchasing assets are 100% financing, flexibility and the tax advantages. Therefore it is crucial that leases are appropriately accounted for and nature and duration of the lease agreement is considered. Current models require lessees and lessors to account for leases as either finance leases or operating leases. A recurring upbraiding of this nuzzle is that lessees are not inevitable to recognize assets and liabilities arising from operating leases. We can see the benefits of this in the financial statements and ratios of FedEx and UPS, as discussed above. In our opinion capitalizing leases provides stakeholders of a less ravening view of a companys financial statements. The contract based come on ensures that companies recognise the recompense to use an asset along with the contractual liability on its balance sheet. intuition and Measurement (Lessee) IASB and FASB are proposing a new approach to lease accounting that ensures entities record assets and liabilities arising from a lease.With this new approach, a lessee would recognize assets and liabilities for leases with a maximal possible term of more than 12 months. Under this contract-based approach, the asset is taken on by the lessee as the right to use to asset and not the asset itself. This a key difference between the contract-based approach and finance leases. When the lease is acquired, the lessee would recognise a lease liability. This would refer to the obligation of the lessee to make recurring lease payments. Additionally, the lessee would recognize a right-of-use asset representing a lessees right to use the underlying asset for the lease term. The right-of-use asset would include the initial measure of the lease liability, any lease payments made at or before startle date and any initial direct costs incurred by the lessee. The proposal further categorizes the leases into example A and cause B leases. compositors case A Lease Recognition undertake assets other than property (such as equipment and vehicles) would be classified as a Type A lease. However, if the following two conditions are met, the lease would be classified as a Type B if the lease term is an unimportant portion of the assets economic life and if the present value of the lease payments is insignificant relative to their fair value. Initial measurements for a Type A lease would include a right-of-use asset and a lease liability.The lease liability would be measurable at the present value of the lease payments, thrifty at the rate aerated by the lessor. If that rate cannot be flat determined, the lessee uses the incremental borrowing rate. Subsequent measurements would recognize interest expense and the amortization of the right-of-use asset separately on the income statement and balance sheet. This would be accounted for separately from the amortization of the asset. Type B Lease Recognition Leased assets of property (such as land or a building) would be classified as Type B leases. Initial measurements would be parallel to the initial measurements of Type A assets. However, subsequent measurements would recognize a atomic number 53 lease cost. This cost would be a measurement of the interest expense as well as the amortization of the asset. This combine figure would be calculated on a straight-line basis. Effect on lively Operating Lease Existing operating leases must be appropriately treated based on the accounting standards for leases.Leases that were previously reported as operating leases by lessees should be recognised using the new approach at the beginning of the earliest comparative period. The lessee should recognize the lease liability, which is the present value of the remaining lease payments. For Type A leases, a right-of-use asset is metrical as a proportion of the lease liability. The proport ion is based on the remaining lease term at the time of the earliest comparative period. Additionally, the right-of-use asset recorded should be adjusted for any previously recognised prepaid or accrue lease payments. On the other hand, for Type B leases, a right-of-use asset is measured at an amount that equals the lease liability. The asset is then adjusted for previously recognised prepaid or accrued lease payments.