You Decide: Should companies leasing equipment be required to record the equipment and leases as assets and liabilities on the balance sheet or as expenses on the income statement?
Response to the following problem:
Current rules require that leases meeting any one of the following requirements should be classified as an asset and liability on the balance sheet:
• A transfer of ownership.
• A bargain purchase option.
• A lease term equal to 75% or more of the economic life of the asset.
• The present value of the payments are 90% or more of the fair market value of the asset at the beginning of the lease term.
However, what if a company leasing the asset decides to structure the lease so that the lease term is 73% of the economic life of the asset or the present value of the lease payments equals 88% of the fair market value of the asset? Should a company be able to use creative techniques in order to structure a lease so that it does not appear on the balance sheet?