ASPE 3065 - Lease

Question 1

Capital lease criteria

Answer 1

• Must meet one of the criteria:
  o Transfer of ownership or bargain purchase option at the end of the lease term
  o Lease term at least 75% of economic life of asset
  o PV of minimum lease payments at least 90% of FV of leased asset
   Discount rate = lower of lessee’s incremental borrowing rate and implicit rate in the lease

Reference: ASPE 3065.06

Question 2

Capital lease criteria – Lessor (ASPE)

Answer 2

• Capital lease if all of the following exist:
• Credit risk is normal
• Unreimbursable costs are estimable
• Any one of the following criteria are met:
  o Transfer of ownership or bargain purchase option at the end of the lease term
  o Lease term at least 75% of economic life of asset
  o PV of minimum lease payments at least 90% of FV of leased asset
   Discount rate = implicit rate in the lease

Reference: ASPE 3065.07

Question 3

Types of capital leases – Lessor (ASPE)

Answer 3

• Sales-type lease
  o Arise when a dealer uses leasing as a way to sell their products
  o Record as sale
• Direct financing lease
  o At inception, FV of the leased property is equal to its carrying value
  o Usually arises when a lessor acts as intermediary between manufacturer and lessee
  o Record as lease receivable (payments to be received and guaranteed residual value, if any)
  o Difference between lease receivable and carrying value should be recorded as unearned finance income
  o Finance income will be recognized each year

Reference: ASPE 3065.29, .30, .37

Question 4

Lease inducements (ASPE)

Answer 4

• Lease inducements are an inseparable part of the lease agreement and, accordingly, are accounted for as reductions of the lease expense over the term of the lease.

Reference: ASPE 3065.27
 

Question 5

Lease Accounting – Land & Building (ASPE)

Answer 5

When a lease contains both land and building, it must first be determined whether the terms allow ownership to pass or provide for a bargain purchase option.
o If yes, the lessee will capitalize the land separately from the building, based upon fair values.
o If no, is the FV of the land at the inception of the lease significant in relation to the total FV of the leased property?
 If yes, the land and building(s) are considered separately for purposes of classification. The lessee and lessor allocate the minimum lease payments between the land and building(s) in proportion to their fair values. Both parties classify the portion of the lease applicable to land as an operating lease.
 If no, the land and building are considered a single unit, and the economic life of the building is considered the economic life of the unit.

Reference: ASPE 3065.70 - .72