Current Generally Accepted Accounting Principles Do Not Require Operating Leases

question 65

Essay

Current generally accepted accounting principles do not require operating leases to be shown on the balance sheet. Consider the case of Company
A. If the operating leases of A Company were added to the company's liabilities at December 31, 2011, the company's current ratio would decline from 0.69 to 0.57 and total debt would increase from $239 million to $1,105 million. Significant changes would also occur in the return on assets since assets would be increased and the related increase in depreciation and interest expense would exceed the rent expense currently included in the company's income statement.
Required:

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Definitions:

Prospective Depreciation

Depreciation calculated from the current period forward, taking into account changes in asset value or estimated useful life.

Economic Benefits

Future returns or advantages from owning an asset or from a transaction.

Property, Plant and Equipment

Tangible assets that are held for use in the production or supply of goods and services, rental to others, or administrative purposes and are expected to be used during more than one financial period.

Asset Recognition

The criteria and process for recording assets on the balance sheet when it is probable that future economic benefits will flow to the entity.