Part 1: Discussion Question
1. From the e-Activity, analyze the results of the proposed changes to lease accounting on operating and capital leases. Identifying how the right-of-use model will impact financial reporting, indicate how companies are likely to manage the change in reporting.
Use the Internet to research the current provisions and proposed changes reflected in the exposure draft for lease accounting under generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS). Be prepared to discuss.
2. Discuss recommendations you would make to chief financial officers (CFOs) of retailers, service providers, and other businesses that lease several locations or have substantial leases of real estate or other assets. Indicate the pros and cons of each approach.
3. From the case study, create an argument for the use of principles-based accounting for leases over rules-based accounting under GAAP, based on the financial statement restatements in the restaurant industry. Provide support for your argument.
4. Assess the materiality of the errors, direction provided by the Securities and Exchange Commission (SEC), and the Sarbanes-Oxley Act (SOX) on the decision by management to restate the financial statements. Indicate the likely impact to stakeholders when financial statements are restated.
Part 2: CASE- Lease Restatements in the Restaurant Industry, 2004-2005
Required
1. Suppose you were advising the CEO and CFO of Brinker International or Starbucks Corporation about whether to restate financial statements for the errors discussed in this case. After reading SEC Chief Accountant Donald T. Nicolaisen's letter to the AICPA, what would you recommend?
2. Evaluate the four operating lease rules discussed in this case. Are the rules needed? How difficult are the lease rules to implement in a large restaurant chain or retail chain, with hundreds or thousands of leases? As part of your answer, would it be reasonable for these chains to force landlords to enter into leases with standard terms that would simplify their lease accounting?
3. U.S. firms may soon shift to International Financial Reporting Standards (IFRS), where accounting standards are based far more on general principles than on highly detailed rules. For example, the International Accounting Standards Board has one standard on leases (IAS 17, Leases), and two lease interpretations (IFRIC 4, Determining Whether an Arrangement Contains a Lease, and SIC-15, Operating Leases-Incentives). Discuss the advantages and disadvantages of far less detailed rules.
4. The IASB is considering a highly simplified lease accounting rule that would require firms to capitalize all leases with a term of more than two or three years. Discuss the advantages and disadvantages of such a simple rule.