Leases Flashcards
(21 cards)
ASPE 3065
Definition of Capital lease
is a lease that, from the point of view of the lessee, transfers substantially all the benefits and risks incident to ownership of property to the lessee.
ASPE 3065
Sales-type lease
is a lease that, from the point of view of the lessor, transfers substantially all the benefits and risks incident to ownership of property to the lessee and, at the inception of the lease, the fair value of the leased property is greater or less than its carrying amount, thus giving rise to a profit or loss to the lessor (usually a manufacturer or dealer).
ASPE 3065
Direct financing lease
is a lease that, from the point of view of the lessor, transfers substantially all the benefits and risks incident to ownership of property to the lessee and, at the inception of the lease, the fair value of leased property is the same as its carrying amount to the lessor (usually not a manufacturer or dealer). A lease is not precluded from being classified as a direct financing lease after it is renewed or extended even though the carrying amount of the property at the end of the original lease term is different from its fair value at that date.
ASPE 3065
Operating lease
is a lease in which the lessor does not transfer substantially all the benefits and risks incident to ownership of property.
ASPE 3065
Bargain purchase option
is a provision allowing the lessee, at its option, to purchase the leased property for a price that is sufficiently lower than the expected fair value of the property, at the date the option becomes exercisable, that exercise of the option appears, at the inception of the lease, to be reasonably assured.
ASPE 3065
Bargain renewal option
is a provision allowing the lessee, at its option, to renew the lease for a rental that is sufficiently lower than the expected fair rental of the property, at the date the option becomes exercisable, that exercise of the option appears, at the inception of the lease, to be reasonably assured. “Fair rental” means the going rate for rental of equivalent property under similar terms and conditions.
ASPE 3065
Contingent rental
is a rental based on a factor other than the passage of time (for example, percentage of sales, amount of usage, prime interest rate, price indices).
ASPE 3065
Economic life of the leased property
is the estimated remaining period during which the property is expected to be economically usable by one or more users, with normal repairs and maintenance, for the purpose for which it was intended at the inception of the lease and without limitation by the lease term.
ASPE 3065
Executory costs
are costs related to the operation of the leased property (for example, insurance, maintenance cost and property taxes).
ASPE 3065
Fair value
is the amount of the consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.
(i) When the lessor is a manufacturer or dealer, the fair value of the property at the inception of the lease will usually be its normal selling price, reflecting any volume or trade discounts that may be applicable. However, the determination of fair value would be made in light of market conditions prevailing at the time, which may indicate that the fair value of the property is less than the normal selling price.
(ii) When the lessor is not a manufacturer or dealer, the fair value of the property at the inception of the lease will usually be its cost to the lessor, reflecting any volume or trade discounts that may be applicable. However, when there has been a lapse of time between the date of acquisition of the property by the lessor and the inception of the lease, the determination of fair value would be made in light of market conditions prevailing at the inception of the lease, which may indicate that the fair value of the property is greater or less than its cost or carrying value.
ASPE 3065
Inception of the lease
is the earlier of the date of the lease agreement and the date of a commitment that is signed by the parties to the lease transaction and includes the principal terms of the lease (this is the effective date used for classification of the lease).
ASPE 3065
Initial direct costs
are those costs incurred by the lessor that are directly associated with negotiating and executing a specific leasing transaction. Such costs include commissions, legal fees and costs of preparing and processing documents for new leases. Such costs do not include supervisory and administrative costs, promotion and lease design costs intended for recurring use, costs incurred in collection activities and provisions for uncollectable rentals.
ASPE 3065
Interest rate implicit in the lease
is the discount rate that, at the inception of the lease, causes the aggregate present value of:
(i) the minimum lease payments, from the standpoint of the lessor, excluding that portion of the payments representing executory costs to be paid by the lessor and any profit on such costs; and
(ii) the unguaranteed residual value accruing to the benefit of the lessor;
to be equal to the fair value of the leased property to the lessor at the inception of the lease.
ASPE 3065
Lease
is the conveyance, by a lessor to a lessee, of the right to use a tangible asset, usually for a specified period of time in return for rent.
ASPE 3065
Lease inducements
are incentives for a lessee to sign a lease (for example, an up-front cash payment to the lessee, an initial rent-free period or reduced rent payments in early periods, the reimbursement of costs of the lessee such as moving costs or leasehold improvements, or the assumption by the lessor of the lessee’s pre-existing lease).
ASPE 3065
Lease term
is the fixed non-cancellable period of the lease plus:
(i) all periods covered by bargain renewal options;
(ii) all periods for which failure to renew would impose on the lessee a penalty sufficiently large that renewal appears, at the inception of the lease, reasonably assured;
(iii) all periods covered by ordinary renewal options during which the lessee has undertaken to guarantee the lessor’s debt related to the leased property;
(iv) all periods covered by ordinary renewal options preceding the date on which a bargain purchase option is exercisable; and
(v) all periods representing renewals or extensions of the lease at the lessor’s option;
provided that the lease term does not extend beyond the date a bargain purchase option becomes exercisable. The lease term is considered to be non-cancellable if cancellation is possible only:
(i) upon the occurrence of some unlikely contingency;
(ii) with permission of the lessor;
(iii) upon the lessee entering into a new lease for the same or equivalent property with the same lessor; or
(iv) upon payment by the lessee of a penalty sufficiently large that continuation of the lease appears, at the inception of the lease, reasonably assured.
ASPE 3065
Residual value of the leased property
is the estimated fair value of the leased property at the end of the lease term.
ASPE 3065
Sale-leaseback transaction
is the sale of property with the purchaser leasing the property back to the seller.
ASPE 3065
Unguaranteed residual value
is that portion of the residual value of leased property that is not guaranteed or is guaranteed solely by a party related to the lessor.
ASPE 3065
Lessee’s rate for incremental borrowing
is the interest rate that, at the inception of the lease, the lessee would have incurred to borrow, over a similar term and with similar security for the borrowing, the funds necessary to purchase the leased asset.
ASPE 3065
Minimum lease payments
From the point of view of the lessee, minimum lease payments comprise:
— the minimum rental payments called for by the lease over the lease term;
— any partial or full guarantee, by the lessee or a third party related to the lessee, of the residual value of the leased property at the end of the lease term (when the lessee agrees to make up a deficiency in the lessor’s realization of the residual value below a stated amount, the guarantee to be included in the minimum lease payments is the stated amount rather than an estimate of the deficiency to be made up); and
— any penalty required to be paid by the lessee for failure to renew or extend the lease at the end of the lease term;
provided that if the lease contains a bargain purchase option, only the total of the minimum rental payments over the lease term and the payment called for by the bargain purchase option is included in minimum lease payments. Lease payments that depend on factors measurable at the inception of the lease, such as the consumer price index or the prime interest rate, are not, in substance, contingent rentals in their entirety, and are included in the minimum lease payments, based on the index or rate existing at the inception of the lease.
(ii) From the point of view of the lessor, minimum lease payments comprise:
— minimum lease payments for the lessee as described above; and
— any residual value or rental payments beyond the lease term guaranteed by a third party unrelated to either the lessee or lessor, provided that the guarantor is financially capable of discharging the obligations under the guarantee.
