Leases Flashcards
<p>What are the characteristics of a capital lease for a lessee?</p>
<p>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</p>
<p class=”large” style=”text-align:center”;>How is a capital lease recorded?</p>
<p class=”large” style=”text-align:center”;>Capitalize at cost:
Asset & Liability Recorded at Present Value of Future Lease Payments
Discount Rate = Lesser of Implicit Rate in the Lease or Market Rate</p>
<p>What footnote disclosures are required for a capital lease?</p>
<p>Future minimum rental commitments
By year – for 5 years
All remaining years as a group
</p>
<p>What are the requirements for a capital lease for a lessor?</p>
<p>Same as for lessee (Title, BPO or Substance), PLUS:
Collectibility of lease payments is predictable
No uncertainties about the lessor reimbursing the lessee for costs incurred</p>
<p>What are the characteristics of an operating lease for a lessee?</p>
<p>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.</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of an operating lease for a LESSOR?</p>
<p class=”large” style=”text-align:center”;>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</p>
<p>What are the characteristics of a direct financing lease?</p>
<p>Interest Revenue (or expense for lessor) decreases with passage of time
Principal amount increases with each payment
Carrying amount of Lease decreases</p>
<p>How is a sale-leaseback recorded?</p>
<p>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</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of lease payments under an annuity due situation?</p>
<p class=”large” style=”text-align:center”;>Payments begin at the start of the lease period
Think: Rent/Mortgage payments are Due at the first of the month</p>
<p>What are the characteristics of lease payments under an ordinary annuity situation?</p>
<p>Payments begin after the end of the first year
Think: An annuity that pays you at the end of each year</p>
