Global Perspective Case – Case 3 Spanish Tunnel International (STI) is a company located in Pedro Valiente, Spain. It is one of the few companies worldwide that specialize in digging deep under-water tunnels for transportation purposes.The company gained a good reputation from digging an89 Kilometer tunnel that connected Estonia with Finland.More recently, representatives from Greece and Turkey met with the CEO of STI and discussed a proposal to dig an underground tunnel that would connect the two countries. They explained that trade between the two countries would increase significantly if goods can be transported safely and expeditiously. However, one issue that was of concern to all parties was the sea floor of the Aegean Sea (the sea between Greece and Turkey), which requires special machinery that is different from what use previously used in past projects. The only company that leases these specialized machinery is Continental Leasing Company, which is a leasing company located in Switzerland. On January 1, 2018, STIdecided to leasethetunnel machinery from Continental Leasing Company. The two companies decided that the lease term is8 years with yearly lease payments of $1,200,000 starting on January 1, 2018 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 thetunnelmachinery is 15 years with no residual value. It is important to note that Continental Leasing Company had just recently purchased the machinery for $16,455,950. On the date of signing the contract between the two companies, the directing manager of Continental Leasing Company told the representative from STI the following:
“It is interesting that you would want to lease these machines at this time. As you know these are specialized machinery that only a few companies worldwide can use. However, an American company called Washington Tunnels (located in the United States) leased the exact same machinery today. Their lease term agreements are the same as yours.
- Discuss some of the challenges that face accountants worldwide when conducting international transactions. (1 Mark)
- Discuss the major difference between GAAP and IFRS. (1 Mark)
- Discuss how the accounting for leases is different under GAAP and IFRS. (1 Mark)
- With respect to leasing the machinery, describe howthe Spanish Tunnel International and Washington Tunnels will record the amount and nature of expenses and the amount of assets related to the leasing agreementfor the year 2018. (5 Marks)
- If Spanish Tunnel Internationaland Washington Tunnels had the choice to select accounting standards to use for this lease transaction, which standards would provide the lowest expenses to each company for the following:
- The year 2022 only.
- The entire 8 year term of the lease contract.
(Your discussion should focus only on how choosing a set of standards would affect the leasing situationbetween Spanish Tunnel International and Washington Tunnels)
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