FAR - Leases: Sales-Leaseback (Becker FAR 5; Roger CPA F-11) Flashcards Preview

FAR CPA Review - (Becker, Roger, Wiley CPA Excel, NINJA) > FAR - Leases: Sales-Leaseback (Becker FAR 5; Roger CPA F-11) > Flashcards

Flashcards in FAR - Leases: Sales-Leaseback (Becker FAR 5; Roger CPA F-11) Deck (11):
1

What is a sale-leaseback?

Sale-leaseback is where a company sells an asset like equipment to another company and leases it back.

2

What is Major sale-leaseback?
Minor sale-leaseback?

Major sale-leaseback is a capital lease (Transfer title, bargain purchase price, 75 life or 90% FV (from payments) where deferred gain is recorded and amortize over the remaining life of asset (economic life).

Minor sale-leaseback is an operating lease. Not a capital lease. No report deferred gain. Record gain right away on on the income statement.

3

What is the rule about the Deferred Gain on the Sale-leaseback?

Major sale leasebacks
= Capital leases
>> where need to calculate the deferred Gain
And: Amortized deferred gains >> Deferred gains / # of periods

Minor sale lease backs = operating lease >> here calculate and recognize ordinary gains.


4

What is the IFRS rule on deferred gains on the Sale-leasebacks?

If sale-leaseback is Capital lease, then any profit should be deferred and amortized.

Selling Prince
- Carry value
--------------------
= Gain be deferred
- (Gain / useful life)
---------------------------
New Deferred gain

FYI - example

$100,000 SP
- 80,000 Carry value
----------------------
= $20,000 Deferred gain
- (20,000 / 5 years) or $4,000
--------------------------------
= $16,000 New Deferred Gain

5

What is the GAAP and IFRS rules on deferred gains on sale-leasebacks?

IFRS: recognize gain as deferred or regular gain
depending if the Lease is (1) Operating Lease or (2) Finance lease


GAAP: Recognition of gains Is dependent on the rights to the leased property retained by the seller-lessee.

6

Sales-leaseback:

US GAAP says: the amount of the deferred gain is determined by the ____ _____ to remaining ___ of the "leaseback" property.

If transferred all risks of ownership to the lessee, then what happens?

US GAAP says: the amount of the deferred gain is determined by the RETAINED RIGHTS to remaining USE of the "leaseback" property.

If transferred all risks of ownership to the lessee, then:
a) It's a true sale where all GAIN is recognized right away in income statement
b) There's NO DEFERRED GAINS.

7

Here are the three categories on sales-leasebacks:

"Substantially All" Rights Retained (greater than 90%)

Rights Retained are Less than "Substantially All" but Greater than "Minor" (between 90%-10%)

Minor Portion of Rights Retained by Seller-lessee (less than 10%)

What are these? How you recognize what type of gain?

"Substantially All" Rights Retained (greater than 90%):
= PV all rent payments = or > 90% of FV on property

HERE: Defer the all of the gain and AMORTIZE it over LEASEBACK period.

Rights Retained are Less than "Substantially All" but Greater than "Minor" (between 90%-10%)
= PV on all rent payments that is less than 90% of the FV, but greater than 10% of the fair value of property at the lease inception.
These leases are accounted for as either capital or operating leases, depending on the criteria.

Defer gain up to PV of the minimum leaseback payments (operating lease or capitalized asset (capital lease).
Gain in excess of this amount is recognized immediately.

Amortized the Defer Gain over LEASEBACK period.

Minor Portion of Rights Retained by Seller-lessee (less than 10%)
= Present value of the rent payments is 10% or less of the fair value of the property at lease inception. These leases are usually accounted for as OPERATING LEASES.

Recognize all (normal) gain or all normal loss at the time of the sale-leaseback transaction RIGHT AWAY. Gains are not deferred in operating-lease type "sales-leasebacks."

8

What are the rules for amortizing

Capital lease (sales-leaseback) on deferred gain / deferred loss??

and

Operating Lease (sales-leaseback) on deferred gain / deferred loss??

Capital leaseback (sales-leaseback):
------------------------------------------------
Any deferred gain or deferred loss is AMORTIZED in proportion to the AMORTIZATION of the leased asset.

(1) Deferred gain = Recognized as Unearned Profit on sale-leaseback
Deferred loss = Recognized as Unearned loss on Sale-leaseback

(2) The "unearned profit (or loss) on sale-leaseback" would be treated as a valuation account of the leased (back) asset.

Operating Leaseback
---------------------------------------
Any deferred gain or loss is amortized in proportion to
the GROSS RENTAL EXPENSES over the life of the lease.

(1) Deferred gain = "Unearned profit on Sale-leaseback"
Deferred loss = "Unearned Loss on sale-leaseback"

(2) AND:

"Unearned profit on sale-leaseback" = reported as Deferred Credit on Balance Sheet

"Unearned loss on sale-leaseback" = reported as Deferred Debit on Balance Sheet

9

What is the rule in regards to:

Real Economic Loss
and
Artificial loss

Real economic loss on sales-leaseback
= Fair value Recognize loss immediately

Artificial Loss
= sales price is below the fair value
= Defer this artificial loss and AMORTIZE it over the Leaseback period

10

Accounting by Seller/Lessee (IFRS):

What are the IFRS rules for Finance Lease as far as recognizing profit goes?

Finance Lease

If a sale-leaseback transaction results in a finance lease, any profit from the sale- leaseback transaction is deferred and amortized over the lease term.

11

Accounting by Seller/Lessee (IFRS):

What are the rules Operating Lease as far as recognizing profit or loss goes based on sales price and fair value?

If a sale-leaseback transaction results in an operating lease, PROFIT or LOSS from the sale-leaseback transaction is recognized based on the leased asset's carrying amount, fair value and selling price.

Sales Price = Fair Value (general rule)
= If the sales price is equal to fair value, any profit or loss is RECOGNIZED IMMEDIATELY (no deferral).

Sales Price Above Fair Value
= If the sales price Is above fair value, any profit should be DEFERRED and AMORTIZED over the period that the asset is expected to be used.

Sales Price Below Fair Value
= If the sales price Is below fair value, any profit or loss is recognized immediately.

EXCEPTION: if the loss is compensated for by future lease payments at BELOW MARKET PRICE
>> DEFER the loss
>> Then: Amortize this Deferred loss over the period that the asset is expected to be USED.

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