Acc3100 Case Study You are an assistant to the CFO of Organic Markets. Organic M

Question

Acc3100 Case Study You are an assistant to the CFO of Organic Markets. Organic Markets is a fast growing national supermarket chain, and is evaluating growth opportunities overseas. The CFO is looking at a natural food grocery chain in France as a potential acquisition target. Both Organic Markets and the French grocery chain lease most of their store space under operating leases. A major shareholder of your company asked your boss whether accounting for operating leases under IFRS is similar to U.S. GAAP. Furthermore, the shareholder asked whether the recently issued new lease accounting standards will have a significant impact on the financial statements of the French company and Organic Markets. Your boss told the major shareholder that he would get back to him in a day or two, as he has not paid much attention to the lease accounting development. Your boss asked you to do some research and prepare a memo for him. The memo should discuss briefly 1) why the FASB/TASB decided to change the lease accounting rules, 2) the key differences (if any) between the FASB's new standard and the IASB's, 3) how the FASB's new standard will impact Organic Markets' balance sheet, income statement and cash flow statement, and 4) how the IASB's new standard will impact the French grocery chain's financial statements.

Explanation / Answer

1) The FASB/IASB decided to change the lease accounting rules due to some limitations in old lease accounting model. The existing accounting models for leases require lessees and lessors to classify their leases as either operating leases or capital leases and to account for those leases differently. Those models have been criticized for failing the meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions.

2) Key difference between FASB's new standard and IASB's standard :

The current GAAP requires only capital leases to be recognized on the balance sheet but the FASB's new standard will require both type of leases to be recognized on the balance sheet.

3) As per the new standard, the company has to recognized all leases on the balance sheet whether it is a capital lease or operating lease. Thus Organic Market's balance sheet is also affected by this change. Since there is an operating lease. Before this change they do not require to recognize the lease in their Balance sheet in case of operating lease but after change recognization is required in this case also. Therefore the management of the organic market should recognize a liability for leases in their Balance sheet.

4.) The French grocery chain is required to recognize a right of use asset and a lease liability. The right of use asset is treated similarly to other non financial assets and depreciated accordingly and the liability accrues interest.

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