Question

Security devices Inc. needs additional office space to accommodate expansion. SDI wants to avoid income statement effects that would disrupt its attempt to “smooth” income over time.

1. Which lease classification would management prefer? Explain.

2. Would meeting SDI's reporting objective be more or less difficult under IFRS? Explain.

3. Does SDI's reporting objective pose an ethical dilemma? Why?

Be sure to support and explain your answers.

4. Who may be affected by SDI's reporting objective? Why?

Answer 1

Answer As per the information we can answer firstly because sol (security devices inc.) income statement effect which its attemp to the smooth (1) wants to avoid would disrupt encome over time if things equal, management would prefer leases to be classified as operating leases: pro d at - A finance lease where the lessee records the more expense and the lessor records, more revenue early on the lifo of the lease. This front loading of lease expense happens for the fact that interest is higher initially than it is in later stago of lease, while the amortization expense for the right of use of asset remain similar each period. Operating leases aroids front loading, for an the accounts operating When stating lease it records total lease expense on a line basis straight over of the term lease. → So this all can be accomplished by recording interest in the normal way. [effective interest rate] and after that Plugging the right-of-use of asset amortization at whatever amount is requir. ed

to cause interest Plus amortization to equal the straight line lease payment amount . Those two components comprise a single lease exp. ense amount reported in income statemene Therefore this statement would be conssterst with SDI attempt to smooth income over time and also a benefit/advantage is that straight line expense recognition makes net income higher in early years of lease than of expense is front loaded .. Security Devices Inc meeting reporting objecti. we would be more difficult under IFRS. By following IFRS NO. 16 all deases are accou- nted for as finano leases by the lessee.. The lessons apply for the classification criteria to distinguish between finance and operating leases, therefore for the leases that quality under US GAAP (two-model approach) as Opera- ting leases, the legsee amortzes the right-on use asset on straight-line basis rather than plugging the amount to cause the total of Interest and amorization to be straight line amount. This refers that those leases under IFRS will have front-loaded expense Profile o n jo tree