FLAME

CASE CONFERENCE 2015

LEASE ACCOUNTING AT FEDEX*

ABSTRACT
As per the existing standards of the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB), accounting of any lease contract in the lessees
accounting books depends on its accounting classification. If a lease contract is classified as a
capital or financial lease, then lessee has to recognize the asset taken on lease under the contract
as a lease asset on the balance sheet while also recognizing the present value of lease rentals and
other cash outflows with respect to lease contract as a liability on its balance sheet. However, if
a lease contract is classified as an operating lease, then lessee does not recognize the asset taken on
lease under the contract as an asset on its balance sheet while also keeping the associated operating
lease liability off its balance sheet. Thus, as per the existing standards of FASB and IASB, all
such lease contracts, which are classified as operating leases, remain off balance sheet. On May
16th 2013, IASB and FASB, as a part of their on-going joint project to converge and revise their
existing lease standards, proposed and published a revised Exposure Draft for Lease Accounting.
As per this revised Exposure Draft, lessee would be required to recognize lease assets and liabilities
in its balance sheet for operating as well as financial/capital leases. This case is about the impact
of new proposed Exposure Draft for Lease Accounting on the balance sheet of FedEx, which
currently has a very high reliance on operating leases for financing of its assets.

Pedagogical Objectives

To discuss basic principles for recognition of liabilities on a companys financial statements

To discuss potential economic consequences of proposed new rules of accounting for leases
on the firms financial position and performance

Case Positioning and Setting

The caselet can be used for MBA Program/MDPs/EDPs Finance Management course to
discuss

Concept of Leasing as a funding source

Current Accounting classification of Leases and their accounting

Concept of Off balance sheet financing

Impact of new proposed lease accounting on the financial statements of such companies
which currently rely heavily on operating leases

* FLAME CASE CONFERENCE 2015

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