Which of the following is most likely a lessee’s disclosure about operating leases?
A/ Lease liabilities
B/ Future obligations by maturity
C/Net Carrying amounts of leased assets
The answer is B. I understand that for Operating Lease, the lessee does not report lease liabilities or net carrying amounts of leased assets since its balance sheet is not going to be affected so only B could be the answer but why?
From Lessee’s perspective, operating lease is just a simple rental expense (on Income Statement); why does the lessee have to disclose “Future obligations by maturity” ?
Please correct me if I am wrong. Does it relate to the concern of financial health such as lessee might not have enough cash for rental expense when it carries too much debt? I really dont’t know.
Please also correct me if I am wrong about A and C.
Companies are obliged to disclose the payments of operating leases in their financial notes and the basic data about the deal, for example maturity of the lease, the total amount, the payments, and even the interest rate.
For example:
Note 20: Financial Obligations
…
…Operating lease for 20 million dollars at 10% interest rate.
2015: 1.5 million
2016: 1.5 million
2017: 1.5 million
2018: 1.5 million
2019 - 2027 : 12 million
Assume my numbers are not exact. You may encounter a financial note with this info in this format.
Maybe I’m partially wrong but IASB is going to change the off-balance-sheet treatment of the operating leases in order to demand that they be accounted as they were financial leases (no more operating lease advantages on the BS)
A similar case is that companies will be obliged to consolidate SPV’s or SPE’s (special purpose entities) to the parent balance sheet. This avoid the fact that poor managed companies could be able to hide excesive debt.
In order to all stakeholders (first of all, creditors) can check the true structure of lessee’s indebtedness with regard to operating leases are not included in the BS. There are many examples in CFA curriculum with temporary financial ratio differences using operating vs financial (capital) leasing in lesses’s FS, mostly within financial leverage domain. Operating lease liability cannot be considered only as kind of operating rent that it is exact hidden fixed liability (debt).
amounts of minimum lease payments at balance sheet date under noncancellable operating leases for:
the next year
years 2 through 5
combined beyond five years
total future minimum sublease income under noncancellable subleases
lease and sublease payments recognised in income for the period
contingent rent recognised as an expense
general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing
In respect with all of above I would mark as correct answer A, not B. Operating lease liabilties may be estimated as well by using EAR as discount factor all future cash flows (payments to lessor). Same is required under IFRS.
Since I am not English native speaker I would translate answer B “Future obligations by maturity” as obligation by closing leasing contract. If it says “Future obligations (liabilities) till maturity” instead, then it can be right answer.