Case : Sale-leaseback; FedEx
FedEx Corporation, the world's largest express transportation company, leases much of its aircraft, land, facilities, and equipment. A portion of those leases are part of sale and leaseback arrangements. An excerpt from FedEx's 2013 disclosure notes describes the company's handling of gains from those arrangements:
Deferred Gains
Gains on the sale and leaseback of aircraft and other property and equipment we deferred and amortized ratably over the life of the lease as a reduction of rent expense.
Required:
1. Why should companies defer gains from sale-leaseback arrangements?
2. Based on the information provided in the disclosure note, determine whether the leases in the leaseback portion of the arrangements are considered by FedEx to be capital leases or operating leases. Explain.