In some cases, FASB standards seem to have been designed to prevent certain reactions by management to engage in “real earnings management” or “window dressing.” Explain what actions the FASB may have been trying to prevent in these cases:

A. Classifying leases. The FASB says that a lease is a capital lease if, when the lease ends, the ownership transfers to the lessee. Why do you think the FASB then added a criterion that, even if the ownership is not transferred, the lease would be considered a capital lease if there was a “bargain purchase option” that made buying the asset very attractive to the lessee?

B. Earnings per share. This is a way of expressing how much of the company’s income during the year relates to each share of stock. The rules for computing earnings per share say the earnings during the year are divided by the average number of shares that were outstanding during the year. Companies must compute this by considering the totals of shares outstanding on each day of the year.

Why didn’t the FASB let companies just use the number of shares outstanding on the first and the last days of the year for this computation?