Cost of Sales when leasing your product

Let's say you're in a job costing type of environment where you lease particular structures or devices that you build to companies over so many years. Let's say that the initial lease is for 10 years. Do you take the total finished goods cost and move it to cost of sales over 10 years? Or should it be costed out not depending on the lease term but rather on the asset type (like depreciating it basically). It seems like there could be issues with consistency if once the 10 years is up, they resign the lease, and then cost of sales drops dramatically... thoughts?

Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

GAAP has some new lease accounting rules that you should look into. They were, in part, designed in consideration of the points you bring up.
Basically they require the leased item to be capitalized and depreciated over the greater of the anticipated lease life + renewals. So if it's a 10 year lease with a 10 year renewal, you might have to take the costs over 20 years. Oh, you also have to impute interest into the payments. And yes, there would be an off-setting lease liability too. Parts of the rules are very reasonable, other parts are comical.
--
Paul Thomas, CPA
www.paulthomascpa.com
  Click to see the full signature.
Add pictures here
<% if( /^image/.test(type) ){ %>
<% } %>
<%-name%>
Add image file
Upload

Site Timeline

BeanSmart.com is a site by and for consumers of financial services and advice. We are not affiliated with any of the banks, financial services or software manufacturers discussed here. All logos and trade names are the property of their respective owners.

Tax and financial advice you come across on this site is freely given by your peers and professionals on their own time and out of the kindness of their hearts. We can guarantee neither accuracy of such advice nor its applicability for your situation. Simply put, you are fully responsible for the results of using information from this site in real life situations.