South British Company is a solar energy company located in the southern part of the United Kingdom. The company specializes in generating electricity, which is then sold to local towns and villages. Due to the global decrease in oil prices, the demand for solar energy is very limited and as a result there are very few companies worldwide that specialize in solar energy production. Recent technological advances have led South British Company to consider replacing its exiting solar panels with high-tech micro-wafer panels that produce five times the amount of electricity as the old panels. On January 1, 2015, South British Company decided to lease 2,500 of the new high-tech panels from EuroLease Company. The two companies decided that the lease term is 5 years with yearly lease payments of $1,291,326 starting on January 1, 2015 and then each December 31 thereafter. The details of the agreement indicate that the interest rate agreed upon by the two companies is 8%. Additional details suggest that the useful life of the solar panels is eight years with no residual value. Although, EuroLease had just recently purchased the solar panels for $8,500,000. On the date of signing the contract between the two companies, the directing manager of EuroLease told the representative from South British Company the following:
“It is interesting that you would want to lease these high-tech panels at this time. As you know these are specialized equipment that only a few companies worldwide can use. However, an American company called New York Solar leased the exact same panels today. Their lease term agreements are the same as yours. The only difference is that South British Company is located in the United Kingdom, while New York Solar is located in the United States.”
1. Discuss some of the challenges that face accountants worldwide when conducting international transactions.
2. Discuss the major difference GAAP and IFRS.
3. With respect to leasing the high-tech panels, describe the amount and nature of expense that South British Company and New York Solar will record for the year 2015.
4. If South British Company and New York Solar had the choice to select accounting standards to use for this lease transaction, which standards would provide the most benefit to each company? Your discussion should focus only on how choosing a set of standards would affect the leasing situation that is mentioned above.