Disclosure of long-term leases in financial statements of lessees;

              Accounting Research BULLETINS
Issued by the Committee on Accounting Procedure, American Institute of Accountants, 270 Madison Avenue, New York 16, N. Y.
Copyright 1949 by American Institute of Accountants
October, 1949
No. 38
Disclosure of Long-Term Leases in Financial Statements of Lessees
1. The growth in recent years of the practice of using long-term leases as a method of financing has created problems of disclosure in financial statements. In buy-build-sell-and-lease transactions, the pur-chaser of land builds to his own specifications, sells the improved property, and simultaneously leases the property for a period of years. Similar transactions are the sale and lease of existing proper-ties or the lease of properties to be constructed by the lessor to the specifications of the lessee. The lessee ordinarily assumes all the costs and obligations of ownership (such as taxes, insurance, maintenance and repairs) except for payment of any mortgage indebtedness on the property.
2. There are many variations in such types of transactions. For example, some leases contain an option for acquisition of the prop-erty by the lessee, while other leases contain a requirement that the lessee purchase the property upon expiration. In some the price to be paid upon repurchase is related to the fair value of the property or the depreciated book value; in others it is an arbitrary amount with little or no relation to the property's worth, or a nominal sum. Some leases provide for a high initial rental with declining payments thereafter or for renewal at substantially reduced rentals.
3. It has not been the usual practice for companies renting prop-erty to disclose in financial statements either the existence of leases or the annual rentals thereunder.1 One of the effects of the long-term lease as a substitute for ownership and mortgage borrowing is that neither the asset nor any indebtedness in connection with it is shown on the balance-sheet. This has raised the question of disclosure in
1 The Securities and Exchange Commission, Regulation S-X dealing with supplementary profit and loss information, requires dis-closure in a schedule, if significant in amount, of ".. . the aggregate annual amount of the rentals upon all real property now leased to the person and its subsidiaries for terms expiring more than three years after the date of filing, and the number of such leases," and the minimum annual amount if the rentals are conditional.
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