Communication Case 15-2
First, this case has no single right answer. The process of developing the
proposed solutions will likely be more beneficial than the solutions themselves.
Students should benefit from participating in the process, interacting first with
other group members, then with the class as a whole.
It is important that each student actively participate in the process.
Domination by one or two individuals should be discouraged. Discussion likely
will include the following:
a. Possible advantages of leasing include:
1. Leasing can preserve the ability to borrow under lines of credit.
2. Leasing can provide an interest rate lower than the incremental borrowing
rate.
b. The lessee views a noncancelable lease as a finance lease if it meets at
least one of the following criteria.
1. The lease transfers ownership of the property to the lessee at the end of the
lease term.
2. The lease contains a bargain purchase option.
Case 15-2 (continued)
1., 3., and 5. are not met. 2. and 4. are met – if the purchase option is viewed
2. The right to purchase the vans at the end of the lease term for $290,000,
4. The present value of the lease payments, not including the maintenance
Present value of lease payments, assuming a BPO:
Lease payments ($300,000 x 3.48685) $1,046,055
In this case, it is a finance lease.
Otherwise:
Present value of lease payments, assuming the purchase option is not a
BPO:
Is 84% substantially all of the fair value of the vans?
Case 15-2 (continued)
Present value of lease payments, assuming a BPO:
Lease payments ($300,000 x 3.48685) $1,046,055
Present value of lease payments, assuming the purchase option is not a
BPO:
Lease payments ($300,000 x 3.48685) $1,046,055
Case 15-2 (concluded)
c. VIP would record the following at December 31, 2018:
Interest expense ([$1,100,000 – 300,000] x 10%)……………….. 80,000
If a BPO is assumed, VIP would have the vans for 7 years:
If a BPO is not assumed, VIP would have the vans for 4 years:
Ethics Case 15-3
Discussion should include these elements:
Leasehold improvement depreciation period
There may be some degree of latitude associated with uncertainty
Ethical Dilemma:
How does a doubtful justification for the estimated life of leasehold
improvements compare with the perceived need to increase reported
profits?
Who is affected?
Person
Keene
Other managers
Real World Case 15-4
Requirement 1
Leasing can allow a firm to conserve assets. They also might be able to avoid
Requirement 2
When finance leases are first recorded, both assets and liabilities increase by
Requirement 3
($ in millions)
Interest expense (difference)……………………. 313
Requirement 4
Communication Case 15-5
Suggested Grading Concepts and Grading Scheme:
Content (80%)
40 Sale leaseback accounting (10 each; maximum 40).
Sale leaseback accounting permitted only when sale portion
qualifies as a sale
40 If it’s not a sale, (10 each; maximum 40).
Since General Tools would retain the right to essentially all of
Writing (20%)
5 Terminology and tone appropriate to the audience (CFO).
6 Organization permits ease of understanding.
Introduction that states purpose.
Trueblood Case 15-6
A solution and extensive discussion materials accompany each case in the
Deloitte & Touche Trueblood Case Study Series. These are available to instructors
at: www.deloitte.com/ us/truebloodcases.
IFRS Case 15-7
Requirement 1
Because SDI wants to avoid income statement effects that would disrupt its
With a finance lease, the lessee records more expense and the lessor records
more revenue early in the life of the lease. This “front loading” of lease
expense/revenue occurs due to the fact that interest is higher initially than it is in
the later stages of a lease, while amortization expense for the right-of-use asset
Requirement 2
SDI’s meeting its reporting objective would be more difficult under IFRS.
Following IFRS No. 16, all leases are accounted for as finance leases by the lessee
Target Case
Note 22 indicates that Target’s operating lease obligations are more than twice
its capital (finance) lease obligations. When Target applies the new standard, those
Air France/KLM Case
Requirement 1
In Note 4: Summary of accounting policies, Part 4.14: Leases, AF states that
“leases are classified as finance leases when the lease arrangement transfers
substantially all the risks and rewards of ownership to the lessee. All other leases
Requirement 2
In the 2015 update to IFRS 17 the lessee makes no distinction between a finance
lease and an operating lease. For all leases (with lease terms of more than 12