Laura Suto

IFRS vs GAAP
1. How should this lease be classified under U.S. GAAP: operating or capital?
Under U.S. GAAP, the code ASC 840-10-25-1 says:
If any of these criteria are true, then the lease is classified as capital.
a. Transfer- there is no transfer in the scenario
b. Bargain purchase- there is no bargain purchase because after the 3 years of the term,
the amount is at the fair market value price, so no bargain
c. Lease term is equal or more to 75%- no because the term is 3 years and a bargain
renewal exists so the estimated economic life would be 3/4.2 = 71.4%
d. Minimum lease payment cannot be less than 90% Fair market value = 111000 *90%= 99,900
Rental payments = 35,000
PV of minimum lease payment = 35000 * 2.83 = 99,169
99169/111000 = 89.3% < 90%
Due to the fact all of the criteria failed, the lease would be classifies as an operating lease.
2. Based on your answer to the previous question, make Stainless Inc.s journal entries for
the lease in Year 8 and Year 9. (Do not worry about income taxes for this case.)
Jan 1 Year 8 Prepaid Rent 36000
Cash
36000
*to record annual rent beginning year 8
Dec 31 Year 8 Rent Expense 36000
Prepaid Rent 36000
*to record annual rent end of year 8
Jan 1 Year 9 Prepaid Rent 36000
Cash
36000
*to record annual rent beginning year 9
Dec 31 Year 9 Rent Expense 36000
Prepaid Rent 36000
*to record annual rent end of year 9
3. How should this lease be classified under IFRS: operating or capital?
Under IFRS, if the lessee recognizes the asset, it is classifies as capital. If the lessor
recognizes the asset, it is classifies as operating. There are determining factors to find out
if the lease is capital, and if it meets just one of them, then it is a capital lease. The
scenario meets one of these requirements and it is, the lease term is a major part of the

economic life of the asset. I believe this is true because the economic life is 4.2 years
and the lease is for 3.
Due to the reasoning above, the lease should be classifies under capital.
4. Based on your answer to the previous question, make Stainless Inc.s journal entries for
the lease in years Year 8 and Year 9.
Date

Annual Lease
Payment

Executory
Costs

Interest on
Obligation
(6%)

Reduction
Lease
of Lease
Obligation
Obligation

1/1/08

99,169

1/1/08

36,000

1,000

35,000

64,169

1/1/09

36,000

1,000

3,850

31,150

33,019

1/1/10

36,000

1,000

1,981

33,019

108,000

3,000

5,831

99,169

Total
Journal Entries:
Jan 1 Year 8

Leased Equipment
99169
Executory Cost Expense
1000
Lease Obligation
35000
Lease Obligation
Cash
*to record annual rent year 8 under IFRS
Interest Expense
3850
Depr Expense
33056
Accrued Int Payable
Accum Depr
*to record annual rent year 8 under IFRS

99169
36000

Dec 31 Year 8

Jan 1 Year 9

Accrued Int Payable

Executory Cost Exp
Lease Obligation
Cash
*to record annual rent year 9 under IFRS

Dec 31 Year 9

Interest Expense
Depr Expense

1981
33056

3850
33056

3850
1000
31150
36000

Accrued Int Pay

Accum Depr
*to record annual rent year 9 under IFRS

1981
33056

5. Assume that Stainless Inc. is a U.S. company that was bought out by a European
company at the beginning of Year 10. At that time, Stainless had to report under IFRS
instead of U.S. GAAP. Because of the change, Stainless has had to reopen its books for
Year 8 and Year 9 (since IFRS requires companies to report at least two previous years of
data each year) and convert them to IFRS. Make one journal entry for each year (Year 8
and Year 9) to convert your U.S. GAAP entries into your IFRS entries.
Dec 31 Year 8

Leased Equipment
66,113
Retained Earnings
1,906
Interest Payable
3,850
Lease Obligation
64,169
*to convert previous entries to IFRS end of year 8
Dec 31 Year 9

Leased Equipment
33,057
Retained Earnings
1,943
Interest Payable
1,981
Lease Obligation
33,019
*to convert previous entries to IFRS end of year 9
6. Based on your entries and your understanding of U.S. GAAP and IFRS, which method
(U.S. GAAP or IFRS) more appropriately presents the economic reality of this
transaction? Defend your answer.
We believe that IFRS is the more appropriate method to present economic reality of this
transaction. There are more relevant accounts that are affected, as opposed to GAAPs
three accounts. Creating a lease amortization schedule is how we find interest expense,
accrued interest, executory cost expense, and depreciation. Doing it this way is more
realistic because there are usually more factors to an equation than rent and rent expense.
In conclusion, IFRS is the appropriate method.