FR - Lease - Lessor Accounting Flashcards
What are the lessor classification criteria
- Accounting for lease is not different.
- Only one transaction, requisite accounting for the lease differs depending on whether the transaction is being recorded from the perspective of the lessor or the lessee
- Lessee can choose whether to accept the condition offered, but cannot force the lessor to offer specific lease term
Finance lease - transfers substantially all the risks and rewards of ownership to the lessee, irrespective of whether legal title is eventually transferred or not
What are the following criteria for a lease to be determined
Have to meet one of the following criteria
1. Title transfer to the lessee by the end of the lease term
2. Bargain purchase option (BPO) exists, and at the date the lease begins, it is reasonably certain that the lessee will exercise it
3. Lease term is of such duration that the lessee will receive substantially all the economic benefit expected to be derived from the use of the leased property over economic life
4. PV of the lease payment amounts to substantially all the FV of the asset
-Necessary to calculate the PV of the lease payment at the end of the commencement date of lease
5. The asset is specialized in nature and only the lessee can use it without major modification
- Relates to the likelihood that the asset truly belongs to the lessee.
IFRS 16 - also considers assessing the classification of
1. The lessee can cancel the lease and the lessor losses associated with the cancellation are borne lessee
2. Gain or losses from the fluctuation in the FV of the residual accrue to the lessee
3. The lessee can continue the lease for the secondary period at a rent that is substantially lower than the market rent
Under a Finance lease, what are the types of lessor
- Non a manufacturer/ dealer (finance company)
- Manufacturer/ Dealer
- Offers by the manufacturer or retailer as a financing mechanism to facilitate the sale of its own product. Lessor recognizes both the sale of the asset with corresponding profit and finance revenue over the life of the lease
Lessor prospective - provided by the finance company or other lenders. Eneityt does not have a prior interest in the asset to be leased.
What are the element for the lease payment
Fixed payment + BPO or guaranteed residual value + Variable payment (some, not all) + Penalties for terminating the lease - Lease incentive = Lease payment
Fixed payment - Excludes any part of the payment pertains to non-lease components in the contract and any part of the payment that is for service provided
BPO - is included in the lease payment total
Lessee must return the asset under lease to the lessor at the end of the lease term. Guaranteed residual value is normally included in the lease payment total at its minimum amount
Variable lease payment - only included in the lease payment total if they are linked to an index or a rate
Penalties - only included in the lease payment total when lease term reflects the ability for the lessee to exercise the option to terminate the lease
Lease incentive - reduce the lease payment total since they are a payment from a lessor to the lesser.
How do you calculate lease payment
Lessor includes not only the individual component previously identified as a lease payment, also the unguranteed residual value when ownership of the asset will not transfer automatically
- Lease payment, guaranteed residual value are discounted to the commencement of the lease using the market or desired rate of return
- Reflect the return of lessor from all asset transfer other than the fixed payment.
What is the initial measurement of determining the lessor recognition
- Net investment in the lease - PV of the lease payment amount an any guaranteed residual value, investment of lease
Net investment in lease if:
PV of each lease option, discounted back to the inception of the lease sing the implicit rate of leas + PV of the guaranteed residual value, discounted using the implicit rate in the lease
IFRS 16 - Provides that the selling price of the asset and resulting profit be adjusted so that the market rate is earned on the finance portion of lease
- Indirect cost (lessor) of the lease contract are then capitalized and increase the net investment in the lease, the implicit rate in the lease is reduced, must be recalculated
Provide the acocunting entries of the recognitio as a lessor for the manufacturer or dealer
Dr. Lease receivable xx
Dr. COGS xx
Cr. Revenue xx
Cr. Equipment. xx
Lease receivable - unguaranteed residual value = PV of lease + PV of residual
COGS- BPO- cost of invenotry
Guaranteed - Cost of inventory
Unguaranteed - Cost of inventory + PV of residual
Revenue - BPO = PV of lease payment + PV of BPO
Guaranteed = PV of lease payment + PV of guaranteed residual value
Unguaranteed = PV of lease agreement
Explain the subsequent measurement of the lessor
- Lease are subsequenelty measured at amortized cost.
Dr. Cash xx
Cr. Lease receivable xx - For lease payment received
Interest revenue
Net investment in the lease * Implicit rate in the lease * Number of month in period = interest revenue for period
Interest set of as:
Dr. Lease receivable xx
Cr. Interest Income. xx
Explain how derecognition has occurred for the lessor
- When the contractual right to the cash flow from the asset has expired, normally at the end of the lease term
- IFRS 16 - requires that the net investment in the lease be unrecognized in the same manner as IFRS9
- Lessor’s right to the cash flow from the contract lease receivable expires when the final payment on the lease is made
- Leassee returns the asset to the lessor at the end of the lease term, assuming that the asset is equipment
IAS 16 PPE - FV of the previously leased asset is greater than the previously expected residual value.
How is operating lease determined for the lessor
- Accounting is more straightforward than a finance lease
- Lessor simply record the lease revenue over course of the lease
- Classification used by lessor for the lease that does not transfer substantially all the risk and rewards incidental to ownership of underlying asset
- IFRS 16 - requires lease be recognized on a straight line over the lease term or other systematic basis
How is the presentation and disclosure determine for the lessor
Presentation - For finance lease, current or non-current portion of the net investment in the lease should be reported separately on company statement of FP
- Operating lease, lessor will present asset subject to operating leases
Disclosure
- Lessor disclosure for leases should include general description of lessor leasing arrangement and statement detailing how lessor manages risk with portfolio
Operating lease
- Lease income for the period arising from operating lease, amount received form variable lease payment not linked to index
- Maturity analysis of lease payment
- Amount of undiscounted lease payment to be received on annual basis
- Total amount of undiscounted lease payment to be received on annual basis
What is the difference between IFRS and ASPE
ASPE 3065 - Capital lease
Direct financing lease - financing mechanism provided by finance company or other lender. Does not have prior interest in the asset to be leased
Sales type lease - to describe a lease that transfer substantially all the risks and benefit of ownership to the lessee and commencement of the lease
Criteria: One of the criteria
1. There is reasonable assurance that woernshipmetn of asset will transfer to the lesser by end of lease term
2. Lease term is a duration that lessee will receive substantially all the economic benefit expected to be derived from use of lease property (75%>)
3. PV of the minimum lease payment amounts to substantially all (90%> or more) of FV of the asset
- Credit risk is normal when compared to the risks of a similar receivable
- Amount of any non-reimbursement cost that are likely to be incurred by lessor under the lease can be reasonably estimated.
