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GAAP - Capital Leases


Edsel

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Thank you Mr. Golar.  If I understand your link correctly, operating leases must be accounted for in the following manner:

Initial Recording of 3 yr lease @ $2000/mo:

Dr.   $72,000   Prepaid Lease;  (asset)

Cr.  ($72,000) Leasehold Liability  (liability)

As rent is paid monthly over course of the lease:

Dr.  $ 3,000  Lease Expense  (current expense)

Cr.  $ 3,000  Prepaid Lease  (asset)

Dr.  $ 3,000  Leasehold Liability  (liability)

Cr.  $ 3,000  Cash  (liquid asset)

This is what happens, as I see it.  ????

 

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As a former CPA for many years and now an Enrolled Agent, it's unclear to me what the issue is here.

Unless your client is required to provide some third party  Compiled, Reviewed or Audited Financial Statements,

most small business tax returns are not prepared according to GAAP.

In fact, most small business tax returns are prepared using "tax basis" accrual or "tax basis" cash methods of accounting or some hybrid method.

My core practice for the last 27 years is based on providing 'internal use" monthly financial statements which are either accrual or cash "tax basis" statements, not GAAP

The statements that I provide my clients do not have any supplemental notes or disclosures.

My clients have been able to obtain bank loans based on these "internal use" statements.

In fact, in 27 years I have never had a loan officer question or reject the statements that I provide my clients.

As far as I am concerned, until the IRS affirmatively requires the capitalization of operating leases, this is a non issue.

 

 

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Cbslee, I don't disagree with your point of view, but I do have a customer who negotiated a loan with a bank in Kentucky who specified quarterly financial statements on a GAAP basis.

Does a study of IRS code include a precept of GAAP except in cases where the code or regs state otherwise?

 

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24 minutes ago, Edsel said:

Cbslee, I don't disagree with your point of view, but I do have a customer who negotiated a loan with a bank in Kentucky who specified quarterly financial statements on a GAAP basis.

Does a study of IRS code include a precept of GAAP except in cases where the code or regs state otherwise?

 

I don't know about your state, but in my state of Oregon only a Practicing CPA would be able to prepare those statements.

As a practical matter, that's why I have never had questions about my "internal use" financial statements,

because compiled, reviewed or audited financial statements are so expensive!

For about five years I did have a client who was a subsidiary of a Swedish Corporation  who did have audited financial statements.

I had to arrange for a CPA with a nearby office to issue reviewed statements to keep the parent company's auditor happy.

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4 hours ago, Edsel said:

I do have a customer who negotiated a loan with a bank in Kentucky who specified quarterly financial statements on a GAAP basis.

That is a pretty normal clause in lending contracts that I have seen in CA.   However, the lender usually will accept an internally prepared financial statement with a CPA reviewed/audited year end statement (specifying that the statements conform to GAAP), and of course the year end tax return.   

For your specific question related to the Capital Lease rules, I think I remember that FASB has a phase in period for adoption, and if I remember correctly, it is based on revenue of the company.   Double check me on this, it was over a year ago that I went to a training on that.   

Tom
Modesto, CA

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Did the Kentucky bank specify as to what level of service the financial statements should be? Compilation, Review, Audit?

In my state NY, only CPAs can prepare Compilations. And even then, not every CPA can prepare Reviews or Audits unless they meet state mandated requirements of 1,000 hours of auditing experience a year and undergo a mandatory peer review program.

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I believe it is standard in all 50 states that only CPAs can issue audit and review financial statements, and in general, non-CPAs are limited to only compilations or products that don't rise to the level of a financial statement. Edsel needs to check his home state of TN's regulations, and KY's if he is physically conducting business there.

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There is now another level of assurance to producing financial statements.  It is called financial statement preparation and I think only CPAs can do them also.  They have an assurance level below compilation.  They require an engagement letter that includes a lot of the language in a compilation report but when you issue the financial statement you do not attach any kind of accountants letter.  I have my book ordered and will learn more about it then and in a future CPE class.

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I am not a CPA, thus the aforementioned statements are being launched by their bookkeeper, and I am advising/preparing taxes only.  If there are book-to-tax adjustments, the adjusted tax liability will need to be incorporated into the statements as well, according to GAAP.

It remains to be seen whether the bank will hold their feet to the fire and require the bookkeeper to validate the statements by using a CPA.  The entity is too small to afford an audit - or even a review in my opinion.

They are almost six months behind on their statements, but are current on the bank loan, so the bank might just leave well enough alone.

Not having to attest to anything (except their tax return), my only interest in the application of GAAP was my original question about whether operating leases must be capitalized or not.

 

 

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  • 2 weeks later...

I have researched and received from good sources some settling information about capitalization of operating leases.

There is a delay in the implementation of this until 2021.  Furthermore there continue to be significant opposition within the ranks of the AICPA from sources who feel the addition of full-term lease numbers simply "bloat" the balance sheet by adding fat numbers to both assets and liabilities.  So it may not even happen.

There has been the phenomenon of "notes" being added to the back of the financial statements, and language stating that the notes are an integral part of the financials.  For what it may be worth, I am a proponent of removing the notes if real numbers can be placed in the financials to measure the effect.  However, that is not always possible.

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"For what it may be worth, I am a proponent of removing the notes if real numbers can be placed in the financials to measure the effect.  However, that is not always possible."

You know, the more you open your ignorant trap the more ridiculous  you sound. By not being a CPA - you apparently don't understand that.

The whole purpose behind having footnote disclosures is to explain or clarify information contained in the financial data so they don't sound or appear to be misleading or to clarify financial information disclosed. They put more validity into the meaning of the financial statements so readers who rely on them could make sound financial decisions.

There are minimum AICPA Compilation standards for non-compliant compilation reports - known as "prepared financial statements'" where there are no footnotes, no legends at bottom of statements, no report provided, etc. but they require engagement letters in order to be compliant with the standards. But since you're not a CPA - you wouldn't know those things.

So keep posting these open-ended misleading questions, attempting to test or tease us on our knowledge to get your jollies.

You don't impress me anymore and I'm not going to further respond to your posts.

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20 minutes ago, Evan S. Golar said:

You don't impress me anymore and...

It surprises me to know that I ever did...

Unlike CBSLee, your responses have never contained anything to bring helpful discussion, only consternation or belligerence.

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For those here that choose to not respond or not see another's posts, I'd suggest scrolling on by, sitting back from the keyboard, taking a break from the forum, or using the IGNORE function. There is no need to make a flounce-like public announcement of withholding answers in future, and stooping to the level of a personal attack on another member is totally unacceptable.

Since Edsel seems to have reached a conclusion regarding his original question and the posts have turned to nastiness, I'm locking this one down.

I'm sorry for the ugliness, Edsel. If you have any other questions, please feel free to post . . .

. . . as long as it isn't politics.  😉 😄

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