Accounting for Leases: Operating or Capital – Does It Really Matter?

Authors
Karen Foust, Christine Smith, Beauregard Parent
Region
North America
Topic
Accounting & Finance
Strategy & General Management
Length
8 pages
Keywords
financial accounting
capital leases
operating leases
Accounting
financial systems analysis
Copyright Holder
Journal of Case Studies
Student Price
$4.00
Target Audience
Undergraduate Students

A top accounting student was struggling with the concept of capital leases versus operating leases. After looking at the financial statements and notes to the financial statements of two airline companies, she realized that operating leases result in large commitments by companies that are not reported as liabilities on the balance sheet. The student decided to restate the financial information as if all lease commitments were reported as liabilities.

Learning Outcomes
  1. Interpret financial statements and financial statement disclosures.
  2. Link accounting theory/concepts with the resulting financial accounting standards, and those standards with the resulting financial statements and financial statement disclosures.
  3. Recognize the objective of financial reporting -- that financial statements "tell a story" -- and demonstrate how a particular accounting standard can affect the telling.
  4. Critique the effects of current lease accounting rules.
  5. Investigate International Financial Reporting Standards (IFRS) regarding lease accounting and construct financial statements according to differing lease accounting rules:
    • Within the available classifications under United States Generally Accepted Accounting Principles (U.S. GAAP) - operating vs. capital
    • Between U.S. GAAP and IFRS.