FAR 3D Leases

Question 1

What is a key difference in lease classification between IFRS and U.S. GAAP?

Answer 1

• ✅ IFRS classifies all leases (lessee side) as finance leases on the balance sheet.
• ⚖️ U.S. GAAP distinguishes between finance leases and operating leases, though both are now capitalized under ASC 842.
• 📝 IFRS results in a single lease expense presentation; GAAP separates interest and amortization for finance leases.

Question 2

What lease rate is used to calculate lease liability under ASC 842?

Answer 2

🔹 Use the rate implicit in the lease, if known
🔹 If not known, use the lessee’s incremental borrowing rate

Question 3

What payments should be excluded when calculating lease liability?

Answer 3

❗ Be careful to exclude payments already made before the measurement date
🔹 Only future payments are included in the lease liability

Question 4

What quantitative lease disclosures are required?

Answer 4

📊 Finance, operating, short-term, and variable lease cost
💸 Sublease income
💰 Net gain/loss from sale-leaseback
📆 Weighted-average lease term
📉 Weighted-average discount rate
🔄 Reconciliation of opening and closing balances of ROU assets
📅 Maturity analysis: 5-year breakdown and total thereafter

Question 5

When is a lease classified as a finance lease?

Answer 5

🏁 Ownership transfers to lessee at lease end
💵 Bargain purchase option likely to be exercised
📆 Lease term covers major part of asset’s economic life
💰 PV of lease payments ≈ FV of the asset
🏗️ Asset is specialized with no alternative use

Question 6

What FASB benchmarks guide finance lease classification?

Answer 6

🔹 Lease term is 75–90% of the asset’s useful life
🔹 PV of lease payments is substantially all (≈ 90%) of asset’s fair value

Question 7

Over what period is the right-of-use (ROU) asset depreciated?

Answer 7

📆 Over the lease term, if no transfer of ownership is expected
🛠️ Over the useful life, if transfer is reasonably certain

Question 8

Are property taxes and operating expenses part of the lease?

Answer 8

❌ Not separate goods or services → part of the lease
🔸 Treated as variable lease costs and expensed

Question 9

What disclosures are required for operating lease maturities?

Answer 9

📊 Undiscounted cash flows for:
🔸 Each of the first 5 years
🔸 Total thereafter

Question 10

How do you calculate the current portion of lease liability?

Answer 10

💸 Start with total lease payment
➖ Subtract the interest portion
✅ Result = current liability

Question 11

When are variable lease payments included in the lease liability?

Answer 11

📈 If tied to a rate or index (e.g. CPI, Treasury yields)
❌ Not included if based on usage or revenue

Question 12

When does lease expense start accruing?

Answer 12

🚀 From the commencement date
⛔ Free rent periods do not delay expense recognition

Question 13

How is amortization done in an operating lease?

Answer 13

📉 ROU asset amortized so total expense = straight-line
🔹 Interest + amortization = equal annual lease expense

Question 14

What lease-related assets are tested for impairment?

Answer 14

🏢 ROU assets of lessees
🏠 Long-lived assets of lessors (operating leases)
💳 Long-term prepaid assets
🛢️ Proved oil & gas properties (successful-efforts)

Question 15

What happens to the ROU asset vs lease liability over time in operating leases?

Answer 15

📈 ROU asset is greater than liability at start of year 2
🔹 Because amortization < lease payments

Question 16

How are leasehold improvements treated?

Answer 16

🏗️ Capitalized by lessee
📆 Amortized over shorter of lease term or improvement life

Question 17

How are non-lease components treated by the lessee?

Answer 17

❌ Not capitalized
💸 Instead, they are expensed

Question 18

How do finance vs operating leases affect the income statement?

Answer 18

💰 Finance lease: interest expense + amortization
💼 Operating lease: single lease expense

Question 19

What must be included in the PV of lease liability?

Answer 19

➕ PV of lease payments
➕ PV of reasonably certain purchase option

Question 20

What qualifies as initial direct costs?

Answer 20

✅ Only incremental costs
❌ General overhead is excluded

Question 21

How are buildings on leased land treated?

Answer 21

🏗️ Building = leasehold improvement
📉 Fully depreciated over lease term if no renewal option
❌ Salvage value is ignored

Question 22

When is a lease modification treated as a new lease?

Answer 22

➕ Lessee gains additional right of use
💵 Repriced at standalone market rate

Question 23

When is variable consideration included in lease liability?

Answer 23

✅ If based on an index or rate (e.g., CPI)
❌ Not included if based on usage or financial performance

Question 24

What factors determine if the lessee is likely to extend the lease?

Answer 24

💵 Lease payments during optional period
📊 Contingent payments
🚪 Termination costs

Question 25

What journal entries does a lessee make at lease commencement under ASC 842?

Answer 25

🧾 Debit Right-of-Use (ROU) Asset for: 🔹 Initial lease liability ➕ Any initial direct costs ➖ Minus lease incentives received 💸 Credit Lease Liability for: 🔹 Present value of lease payments 🪙 Credit Cash for: 🔹 Any payments made before or at commencement

Question 26

How is a lease modification accounted for if it's not a separate contract?

Answer 26

🔁 Reassess the lease from the modification date 🔄 Apply guidance in ASC 842-10-25-10 through 25-14 🔁 Lease classification may change (e.g., finance → operating) 📆 The revised terms affect both ROU asset and lease liability

Question 27

How do expense patterns differ between finance and operating leases?

Answer 27

💰 Finance leases use the effective interest method, resulting in: 📈 Higher interest expense early, lower later 🔹 Separate recognition of interest and amortization 📏 Operating leases produce a constant annual lease expense, combining: 🔸 Interest 🔸 Amortization ➕ Results in a straight-line pattern