Accounting for Leases

Question 1

What are type of leases for lessor and lessee?

Answer 1

Lessor - Operating and Nonoperating
Nonoperating has two types:
1) Sales-type with selling profit and without selling profit
2) Direct financing (rare)

Lessee - Operating and Finance

Question 2

Finance lease criteria

Answer 2

1. Specialized nature - item is a specialized nature that at the end of the lease, the lessor doesn’t want it back
2. Purchase option
3. Transfer title
4. Major part - 75% or more of life
5. Substantially all - 90% or more of FMV
   * *for #4 and #5, if you are at last 25% of leased life, then you can’t use these to test

Question 3

Who’s gonna depreciate/amortize the lease at finance lease? and how do you calculate to amortize?

Answer 3

Lessee, not lessor
Use useful life / legal life
@ end of the lease => purchase it, then use useful life to amortize
if not, shorter of useful or legal life (lease term)

Question 4

Lease under IFRS - what’s the differences?

Answer 4

1. All leases are considered finance lease
2. Any lease with purchase option cannot be classified as short-term lease, but “low-value lease” $5000 or less could be considered short-term lease even with purchase option
3. IFRS requires re-measurement of lease liability (or lease receivable) if the index or rate tied to variable lease payment changes, resulting in a change in cash flow