More troubles with lease accounting

Hypercom reported that it will need to restate its results for the first three quarters of 2004 to correct how it accounts for its leases. Previously it had concluded that 3,200 of its leases should be accounted for as sales-type leases when instead it should have accounted for the leases as operating leases. The company stated that it will lower its revenue by over $4 million dollars for the first three quarters, it also reported that operating revenue would be cut by $2.6 to $3.0 dollars. The gross margins on these leases must have been large (somewhere between 65% to 75%), and this suggests the reason why Hypercom would want to treat the leases as sales type leases.

An examination of this restatement also allows for a good class discussion of the motivations for lessors and lessees. Most lessors want capital lease treatment, while lessees would rather have operating lease treatment. Students should be able to think about why lessors and lessees want differing treatment and how through proper structuring each can get what it wants. usually this is done by purchasing residual value insurance or more complex structuring.