Q: If the U.S. adopted the IAS treatment of financial leases, what would happen to the average company’s ROE and Current Ratio? A: ROE- Increase B: Current Ratio: No change I thought that a capital lease was a long-term asset and long-term liability so no change to current asset. I also thought that Operating income would increase because Depreciation is less than lease expense, but when you add in interest expense, NI actually goes down? Can I get a final ruling on this? Thanks all.
In the early years, the depreciation expense is greater than the interest expense.
What’s the difference between IAS treatement and US GAP treatement of financial leases? FSA’s been awhile.
What’s the difference between IAS treatement and US GAP treatement of financial leases? FSA has not been a while. Nevertheless, I have no clue
i thought pretty much all leases are capitalized everywhere now. i.e. it’s completely standard.
westbruin Wrote: ------------------------------------------------------- > i thought pretty much all leases are capitalized > everywhere now. i.e. it’s completely standard. I would say that operating leases are more frequent than capitalized leases (at least in the US). But the question is regarding the difference in treatment between a capitalized lease under US GAAP and a capitalized lease under IAS GAAP. I am not aware of differences there (but I am not familiar enough with IAS in general)
I just checked my stalla notes for the Level I FSA review and it doesn’t mention anything about IAS GAAP for the treatment of leases.
where exactly did u get this question from? I dont think it’s covered by any of the LOS’s. And if it is…then it seems like I don’t remember anything :-\
i feel the same way, ruhi22
This question comes from the Schweser Qbank…it says in the answer that the IAS treatment is to capitalize the lease. So with that knowledge, can anyone tell me what happens to operating income and net income when you capitalize a lease rather than have an operating lease? and why?
i feel the same way, ruhi22 & maratikus
gustobub2 Wrote: ------------------------------------------------------- > This question comes from the Schweser Qbank…it > says in the answer that the IAS treatment is to > capitalize the lease. So with that knowledge, can > anyone tell me what happens to operating income > and net income when you capitalize a lease rather > than have an operating lease? and why? That’s a completely different question. In early years, ROE is lower than what it would have been woth operating lease because NI goes down becasue interest + depreciation > rent expense. The interest part is the one making the difference. In later years ROE is greater than what it would have been woth operating lease because interest + depreciation < rent expense Current ratio: No change: we just created a LT asset and a LT liability.
In the early years- Net Income will be lower because the Depr + Int. Exp under the Capitalization is more than the lease payment under an operating lease. In the later years, Net Income will be higher under a capitalized lease compared to an operating lease. The Operating Income will be higher under capitalization because the interest payment is no deducted. Under operating lease, the lease payment is deducted, so the operating income is lower. Edit: Olivier and maratikus, the second question that’s been posted is covered by LOS 30. I don’t know about the original IAS question though.
Exactly my point. They are saying that NI actually goes up and not down and that ROE goes up. So which is right?
NI goes up in the later years. Probably that’s what the question talks about?
gusto, I don’t know what question you are talking about, but I remember finding a question that was inconsistent. http://www.analystforum.com/phorums/read.php?12,671827,671827#msg-671827
I would like a final ruling on that one as well. No one could really answer it.
isn’t it true that under IAS, financing or sales lease recognizes a gain at inception? while under US GAAP it isn’t allowed? that’s the only piece I remember.