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Lease Accounting at FedEx

THE ECONOMIC TIMES | September 8, 2015
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Krishna, an MBA (finance) student at a premier business school, aspired to be an investment banker and was doing his internship with a renowned financial services firm in Mumbai.

His project included financial analysis of FedEx’s financial statement. He had almost completed his analysis and prepared a draft report on FedEx and its financial condition. Before finalising the draft, he decided to meet his Team Lead Daniel and discuss his findings.

While reading his financial report, Daniel observed that Krishna had not considered any off balance sheet information for the analysis. Krishna had overlooked an important item — the operating lease amount, which was kept off balance sheet.

Daniel asked Krishna to go through the FASB’s newly-proposed lease accounting changes and then redraft the required analysis as FedEx’s lease amounts might bring a significant difference in the analysis.

As per the standards of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), accounting of any lease contract in the lessee’s books depends on its accounting classification.

On May 16, 2013, IASB and FASB, as a part of their project to converge and revise their existing lease standards, proposed a revised Exposure Draft for Lease Accounting. As per this revised Exposure Draft, the lessee would be required to recognise lease assets and liabilities in its balance sheet for operating as well as financial/ capital leases.

Krishna analysed the financial reports again and started noting down the impact of the changes on the income statement, the balance sheet and the cash flow statement and was wondering how far these changes would affect industries with higher operating lease.

PROF MANOJ KUMAR, Flame School of Business, FLAME University, Pune
NARESH SHARMA, Associate FTI Consulting, New Delhi