853 FINANCIAL REPORTING CASE It’s a Hit! “Don’t get too comfortable with those big numbers,” said Aaron Sanchez, controller for your new employer. “It’s likely our revenues will take a hit over the next couple of years as more of our customers lease our machines rather than buy them.” You’ve just finished your first look at Higher Graphics’ third quarter earnings report. Like most companies in your industry, HG leases its labeling machines to some customers and sells them to others. Eager to understand the implications of your new supervisor’s concerns, you pull out your old intermediate accounting book and turn to the leases chapter. Accounting by the Lessor and Lessee If you ever have leased an apartment, you know that a lease is a contractual arrangement by which a lessor (owner) provides a lessee (user) the right to use an asset for a specified period of time. In return for this right, the lessee agrees to make stipulated, periodic cash payments during the term of the lease. An apartment lease is a typical rental agreement in which the fundamental rights and responsibilities of ownership are retained by the lessor; the lessee merely uses the asset temporarily. Businesses, too, lease assets under similar arrangements. These are referred to as operating leases . Many contracts, though, are formulated outwardly as leases, but in reality are installment purchases/sales. These are called capital leases ( direct financing or sales-type leases to the lessor). Illustration 15–1 compares the classification possibilities. PART A An apartment lease is a typical rental agreement referred to as an operating lease. By the time you finish this chapter, you should be able to respond appropriately to the questions posed in this case. Compare your response to the solution provided at the end of the chapter. 1. How would HG’s revenues “take a hit” as a result of more customers leasing rather than buying labeling machines? ( p. 860 ) 2. Under what kind of leasing arrangements would the “hit” not occur? ( p. 868 ) QUESTIONS Illustration 15–1 Basic Lease Classifications Lessee Lessor ● Operating lease ● Operating lease ● Capital lease ● Capital lease: ➥ Direct financing lease ➥ Sales-type lease After looking at some of the possible advantages of leasing assets rather than buying them in certain circumstances, we will explore differences in leases further.
Spiceland_Inter_Accounting8e_Ch15
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