Contract Structuring Under the New Lease Accounting Rules: The Case of the Custom Design Retail, Inc.

In 2013, the International Accounting Standards Board and the U.S. based Financial Accounting Standards Board published a revised exposure draft that proposes significant changes to lease accounting under U.S. Generally Accepted Accounting Principles (GAAP). One change involves the lessee recognizing a right-of-use asset and related lease liability for all leases, including those currently classified as operating leases. This case requires students to consider the impact that the proposed leasing standard will have on a lessee’s balance sheet. In addition, the case addresses how such an accounting change creates challenges for management who operate under a plethora of contracts based on accounting numbers determined by the accounting standards. Lastly, the case introduces an ethical dilemma faced by accountants of a hypothetical public company. Students are asked to reflect on this ethical dilemma with the help of the Institute of Management Accountant’s (IMA’s) Statement of Ethical Professional Practice.