Lease classification of aircraft leasing : a case study of cross-border leases between Korean Air and its subsidiary

Abstract

Aircraft leasing represents a significant portion of the financial statements of airline firms. Accounting treatment of lease transactions is becoming more complicated as firms attempt to achieve off-balance-sheet outcomes vis a vis special purpose entities(SPC). Cross-border leasing involving SPCs in particular raises a variety issues stemming from international differences between accounting regimes. This thesis utilizes an example of cross-border leasing between Korean Air and its Irish subsidiary to illustrate the complexity related to lease classification. It begins by exploring the industry background, the concept of leasing, traditional lease criteria and current issues/trends in accounting. Next, relevant lease accounting rules are reviewed and compared to international and US GAAP. This includes key issues in lease classification such as 'substance of transactions' and 'the financial impact on the related parties'. The study reveals that the case can be assessed differently within the context of terms and conditions of the lease and related accounting rules. While such accounting interpretation may vary, the best answer appears that it is essential that firms present transparent financial information to the related parties.