F5: Capital/Finance Leases Flashcards Preview

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Flashcards in F5: Capital/Finance Leases Deck (21):
1

Lessee Capital Lease Criteria (GAAP)

Just has to meet one:
O- ownership transfers at end of lease
W- written option for bargain purchase
N- 90% of FV of asset is < PV of lease payments
S- 75% or more of asset life is committed

2

Lessee Finance Criteria (IFRS)

O- ownership transfers
W- written bargain purchase options
E- most of economic life
S- PV of minimum lease payments amounts to substantially all of the FV
F- gains/losses from fluctuation in FV accrue to lessee
A- ability to continue the lease at a lower cost than market
C- can cancel lease
S- specialized nature- can't be used by another

3

Lessor: Sales-Type/Direct Financing Type Criteria

"Owner has to have all the LUC" (so all 3)
L- lessee owns the leased property
U- uncertainties do not exist
C- collectability of lease payment predictable

4

Sales-Type Lease has how many profits?

2
-Gain on sale
-Interest Income

5

Direct Financing Lease has how many profits?

1
-Interest income

6

Lessee Capital (Finance) Lease: How to record the lease

Records the lease as an asset & liability at the LESSER of:
- FV of asset @ inception of lease
- Cost (PV of minimum lease payments)

7

Items to include in lease cost:

-Any obligated payments
-Bargain purchase option
-Guaranteed residual value

8

Items to exclude in lease cost:

-Executory costs (insurance, maint, taxes)
-Optional buyout (not required and not a bargain)

9

When calculating PV of minimum lease payments, remember these things:

If Periodic Payment = use PV of annuity due or ordinary
If Bargain Purchase Option OR Guaranteed Residual = use PV of $1

10

Lessee: Interest Rate to Use;

LOWER of:
-Lease rate (if known)
-Lessee's borrowing rate

11

Basic depreciation calculation

Capitalized lease assets less salvage value = depreciation basis

Then divide by periods of benefit = depreciation expense per period

12

Period of Benefit (GAAP)

O &W = use asset life
N & S = use lease life

13

Period of Benefit (IFRS)

Use SHORTER of lease term and assset life

14

Lessee's disclosures of leases

Disclose everything- the more the better

15

Lessor Accounting: Recording a sales-type (finance) lease

Know calculations for:
-Gross investment
-Net investment
-Unearned interest revenue
-COGS
-Sales Revenue

16

Lessor Accounting: Recording a direct financing (finance) lease

Know calculations for:
-Gross investment (same as sales-type)
-Net investment (same as sales-type)
-Unearned interest revenue (same as sales-type)
(no sales revenue or COGS)

17

Gross Investment Calculation

Lease Payment
+ Unguaranteed residual value
= Gross Investment

18

Net Investment Calculation

Gross investment
X PV
= Net Investment

19

Unearned Interest Revenue Calculation

Gross investment
- Net investment
= Unearned interest revenue (future interest)

20

COGS Calculation

Cost of asset
- PV of unguaranteed residual value
= COGS

21

Sales Revenue Calculation

Cost
+ Profit
= PV AKA SP AKA FV