CASE

Enronoff, a recently created company in the Telecommunications industry, has decided to invest $1.2 Billion in its property, plant and equipment. That is because the business is actively looking at improving its competitive positioning in a super saturated but stable market.

Due to lack of growth in the overall market, shareholders and shareholder groups are actively courted by businesses. Since this industry is ripe with analysts, who rely heavily on the financial statements, the pressure is acutely felt to present the best foot forward - at all times.

As a result, the CFO*, is not feeling enthusiastic about the large dollar values and the varieties of complex leases that Enronoff is looking at acquiring. On the one hand, he would rather enter leaseback arrangements. On the other hand, he is aware of the consequences on his balance sheet due to most of his chances at reporting operating leases having been obliterated.

However, his board directors are not convinced that they should overlook any potential opportunities to squeeze past reporting requirements e.g. force certain transactions to be disclosed as operating leases.

This will raise multiple issues - as some of these lease transactions are uncommon and have never been recorded. As a result, the CFO is also considering how to prepare his accounting policies, in anticipation of this mounting pressure.

*On a personal note, the CFO is also worried about ethical considerations around lease reporting and would like to do "the right thing." Having worked internationally, he is keenly aware of the global ramifications of improperly disclosing liabilities & the significant impact that this has had on the global economy. As a result he is strongly against potentially contributing towards any deterioration in the reporting quality that he feels international standards have so painstakingly established. However, he does feel it is him against the entire board - and even his CEO. Whilst the CFO has control over the Finance Controller and the finance team, in the end, the CFO feels he still has a job to do - meaning he still reports through to the CEO and the board. The CFO is aware that the other executives are not particularly well-versed in accounting standards and he fears he will need external support to move this issue in the right direction.

Assessment Tasks:

As part of his preparation, the CFO has reached to you, an ex-auditor, familiar with leases and accounting standards in general for advice, as a paid and external consultant of some repute. He is hoping that if it came from you, his fellow executives might just listen to common sense.

So, he would like you to make paper for his board that addresses the following:

A)What is the justification for the increased reporting requirements around leases globally & locally - so that the CFO feels that his position is more supported? Please do not neglect any social and ethical considerations in your answer.(6 marks)

B)Please explain the staunch opposition facing leases being classified as operating leases - and their virtual elimination.(8 marks)

C)Please explain some of the lease reporting processes and how stringent they are (referring to the proper standards and paragraphs) - this will help the CFO explain to his board that it will be difficult to "hide" anything in the balance sheet or expense accounts.(8 marks)

D)The CFO expects that his lessors will feel pressure from the board - particularly when it comes to right of use, due to the astronomical dollar amounts involved within the proposed leases. As a result he has asked you to demonstrate the leases reporting requirement - from the lessor's point of view too. This is to further discourage his board from unduly pressuring the lessors.(8 marks)

Finally, you have been asked to explain options and other means by which the board may be tempted to wrongfully shift ownership of these leases away from Enronoff - and how that would be ill-advised. Please refer to the right accounting standards and paragraphs to give legal support to the CFO's position.