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Flashcards in Leases Deck (38):
1

How is a Capital Lease recorded?

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

2

What footnote disclosures are required for a Capital Lease?

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

3

What are the requirements for a Capital Lease for a lessor?

Same as for lessee (Title- BPO or Substance)- PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

4

What are the characteristics of an Operating Lease for a lessee?

Risk of ownership does NOT pass

No asset or liability is recorded on the financial statements

Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement's life.

5

What are the characteristics of an Operating Lease for a LESSOR?

Rent revenue recorded

Leased property remains an asset and depreciated by lessor

If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

6

What are the characteristics of a Direct Financing Lease?

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

7

How is a sale-leaseback recorded?

Any profit on the sale is deferred and amortized

Exception: If PV of lease payments is 10% or less of the asset's FMV- the gain is recognized

If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

8

What are the characteristics of lease payments under an annuity due situation?

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

9

What are the characteristics of lease payments under an ordinary annuity situation?

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

10

What are the characteristics of a Capital Lease for a lessee?

Risk of ownership passes to lessee by:
Title,
Bargain Purchase Option (BPO),
Substance - Lease is more than 75% of asset's useful life or PV of minimum lease payments are more than 90% of fair value

11

Treatment of lease bonus

Deferred and recognized over the life of lease on straight line basis

12

Lease disclosure requirements

Disclose future minimum lease payments for 5 years and lease term in aggregate. Minimum lease payment excludes variable costs

13

How are scheduled rent increases treated

Straight line of uneven lease payments

14

Depreciable life of leasehold improvements (lessee)

Depreciated over lesser of lease term or useful life

15

Treatment of leasehold improvements under lease with renewal option

Depreciate over original and renewal period of renewal is probable

16

Calculate total interest revenue over life of lease

Total lease payment - FV of leased asset

17

What do direct financing leases recognize

Interest revenue

18

How is gain and interest treated and calculated in sales type lease

Lessor recognizes gain
Gain = PV of lease payments or selling price - Cost
Interest = SP - downpayment x interest rate x time

19

What is unearned income on sales type lease

Gross investment - sum of PV of gross investment components

20

What is unearned income on direct financing lease

Gross investment - cost (PV of lease payments

21

Revenue recognition of sales type lease requires what method

Interest method, constant rate of return

22

How does lessee record leased asset and lease obligation

Lower of PV of minimum lease payments or FV

23

Rate used for PV of minimum lease payments

Lower if incremental borrowing rate or lessors implicit rate if known by lessee

24

What is included in minimum lease payments

Rentals, lessee guaranteed residual value or bargain purchase option

25

What is a bargain purchase option

Option to purchase asset for less than FV

26

When is guaranteed residual value included in minimum lease payments

Of guaranteed by lessee and not 3rd party

27

How are a lessee's annual executory expenses treated

Executory expenses (ie real estate taxes) are expense as incurred and excluded from minimum lease payments

28

How is equipment under capital lease depreciated?

By lessee over the useful life of the asset

29

Bargain purchase option treatment at end of lease term

Remains in lease payable

30

What is a sale leaseback and how is gain or loss treated

Treated as though two transactions were a single financing transaction

Gain or loss is deferred and amortized over lease term (if asset to lessor) and economic life (if asset to lessee)

31

Sales leaseback exceptions to deferred gain

PV of lease payment is 10% or less of FV of sale leaseback property
Leaseback is more than a minor part but does not meet capital lease requirements

32

Treatment of sales leaseback gain for more than minor part but less than substantially all

Recognize gain except for PV of lease payments - amortize

33

When to recognize sale leaseback losses

If CV > FV recognize immediately

If SP < CV but FV > CV defer loss

34

When is a lease an operating lease even though substantially all the remaining use of the leased asset is retained by the lessee

When lease term begins within last 25% of assets original life

35

How is a deferred gain treated and how does it represent the lease transaction

Acts like a valuation allowance

Net amount shown for leased asset being equal to the same CV as if sale leaseback did not occur

36

How is lease termination penalty recorded

Current expense in continuing ops

37

How is a modification from capital lease to operating lease treated

As a sale leaseback transaction

38

How is lease of land treated under IFRS

If land doesn't transfer at end of lease, record land as operating lease even of building is a financing lease