Leases Flashcards
Short term lease
A lease of less than 12 months with no transfer of ownership of the asset. The lessee doesn’t list the asset being rented on their balance sheet, nor does the lessor remove the asset from their balance sheet like they would with a finance lease.
Lessee:
Monthly debit to lease expense (or rent expense)
Credit to cash or accounts payable
Lessor:
Debit cash or accounts receivable for monthly payments
Credit lease revenue
Operating lease
A lease of 12 months or longer but doesn’t qualify as a finance lease. There is no transfer of ownership of the asset. However, the lessee recognizes the leased asset on the balance sheet.
The lessee records a right of use asset on its balance sheet- a debit and a lease obligation also on the balance sheet a credit.
The lessor keeps the assets on their books and depreciates the asset over the lease term.
Finance lease
This is treated as if it were a sale. Ownership of the asset is transferred, and the lessee recognizes the asset on their balance sheet and the lessor removes the asset from their balance sheet.
Residual Value Guarantees
This is when the lessee guarantees a residual value, meaning if the value of the asset is less than the guaranteed amount at the end of the lease, the lessee pays the lessor the difference. At the beginning of the lease, the PV of the guaranteed residual value is included in calculating the lessee’s lease obligation.
Purchase Option
This is an amount that the lessee will buy the asset for at the end of the lease. This purchase amount is included in the lessee’s obligation at the beginning of the lease. This purchase option is only calculated or used if it is reasonably certain that the lessee will exercise the option at the end of the lease
Annuity Due vs Ordinary Annuity
An annuity due will be the PV factor used if the payment is due at the beginning of each period. A ordinary annuity is used if the payment is due at the end of each period.
Initial entry for an operating lease
To get the initial value of the right of use asset to record on its books, the lessee takes the annual lease payment and multiplies it by the applicable PV factor for an annuity due based on the implicit interest rate.
5 criteria for Finance Leases (Lessee)
- If ownership transfers at the end of the lease
- If there is a purchase option at the end of the lease that the lessee is reasonably certain to exercise.
- If the lease term is greater than or equal to 75% of the useful life of the leased asset
- If the present value of the lease payments is greater than or equal to 90% of the FMV of the leased asset.
- If the asset is specialized in nature such that is has no alternative use to the lessor after the lease
If any is true then it’s a finance lease.
Two criteria for Direct Financing lease (both must be met)
- The present value of the lease payments + the guaranteed residual value exceeds or is equal to the FMV of the asset.
- It is probable that the lessor will actually receive all the lease payments and the guaranteed residual value.
Lessor categories
If one of the 5 criteria are true then it’s a sales type lease for the lessor. If none of the 5 criteria are met then the lessor either has an operating lease or direct financing lease
Initial entry for lease liability
Right of use asset xxx
Lease Liability xxx
The first payment
Interest expense
Lease liability
Cash
Lessor calculation for lease payments
FV of equipment +/- a guaranteed or non guaranteed residual amount and dividing by present value factor of the annuity type being used
IFRS difference for leases
Almost all leases are considered to be a finance lease unless the lease amount is $5,000 or less
Leasehold improvements
Any costs for leasehold improvements are capitalized to a leasehold improvement asset account and amortized over the shorter of either the remaining lease term, or the useful life of the improvement.
