Flashcards in Leases Deck (39):
What footnote disclosures are required for a Capital Lease?
Future minimum rental commitments
By year - for 5 years
All remaining years as a group
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
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.
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
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
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
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
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
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
In an operating lease, who depreciates the asset?
Define Operating Lease
"True Rental" Rights & Risks of ownership stay with the Lessor. They are not transferred to the Lessee
In an Operating Lease, how does the Lessee handle rent expense, a lease bonus, leasehold improvements, and a refundable security deposit
Rent expense=Uniformly recognized;
Lease Bonus is amortized over lease term.
Leasehold Improvements are PPE & Amortized over SHORTER of Lease Term or Useful Life.
Refundable security deposit is A/R.
Criteria of Capital Lease
1 of 4 are met:
1. TT (Title Transfers from Lessor to Lessee),
2. BPO (Bargain Purchase Option-Lessee will buy asset),
3. Lease Term is >= 75% of useful life,
4. PV of MLP is >= 90% of FMV of property
If Capital Lease is based on TT or BPO, how is asset depreciated? How is salvage value treated?
Lessee depreciates asset over the Useful Life.
Subtract salvage value (include it like normal)
If Capital Lease is based on 75% term or 90% FMV, how is asset depreciated? How is salvage value treated?
Lessee depreciates asset over SHORTER of Useful Life and Lease Term. Ignore Salvage Value.
2 types of leases for the Lessor
Operating or Non-Operating
2 types of leases for the Lessee
Operating or Capital
What's factored into a Minimum Lease Payment (MLP)?
(PV of MLP >= 90% FMV -->Capital Lease)
Include +PV Annual Pmt +PV BPO +Guaranteed Residual Value (like salvage value) +Penalities
EXCLUDE EXEC. COSTS like taxes, ins., maintenance
What rate is used to determine the PV of MLP?
Lessor always uses Implicit Rate. Lessor determines Implicit Rate & doesn't always tell Lessee.
Lessee uses Incremental Rate or Implicit Rate. Lessee only uses Implicit if it is Lower & Known.
JEs for Capital Lease where first payment is on Day 1 (an annuity due-now)
DR Leased Asset
CR Lease Liability
DR Lease Liability
Payment @ YE
DR Lease Liability
DR Interest Expense
DR Depr Exp
CR Accum Depr
Operating Lease - Describe Lessor's responsibilities
Op Lease, Lessor:
-S/L Amortizes Lease Costs (Commissions, Legal Fees) over lease term
-Recognize Executory Costs as Incurred (Taxes, Ins, Main.)
-Recognize Uneven rent payments Uniformly
-Nonrefundable security deposit=unearned revenue
-Refundable security deposit=A/P
Criteria of Non-Operating Lease
a. Accounted for by LESSOR
b. 1:4 TT, BPO, 75% term, OR PV MLP 90% FMV
c. BOTH COLLECTIBILITY of Lease Payments & MEASURABILITY (no significant uncertainties regarding unreimburseable costs)
2 Types of Non-Operating leases for the Lessor
1. Sales Type Lease
2. Direct Financing Lease
How does Lessor handle Capital Lease for Land Only if there IS Profit/ Loss?
Land Only, Yes P/L, Lessor treats as Sales Type Lease
How does Lessor handle Capital Lease for Land Only if there IS NOT Profit/ Loss?
Land Only, NO P/L, Lessor treats as Direct Financing Lease
Lease for Land & Building, TT or BPO, how does lessee handle?
Lessee capitalizes the land and building separately.
Lease for Land & Building, NO TT or BPO, how does lessee handle?
Determine Significance of Land: If land is less than 25%, ignore it and treat as building only.
If land is >=25% FMV of lease, then capitalize land & building separately.
Property owner sells the property, then immediately leases all or part of it back from the new owner.
JEs for Operating Leaseback
DR Rent Exp 50
CR Cash 50
DR Deferred Gain 20
CR Rent Exp 20
Rent Exp offsets itself
JEs for capital leaseback
DR Depr Exp 50
CR Accum Depr 50
DR Deferred Gain 20
CR Depr Exp 20
Depr Exp offsets itself
Sale-leaseback may be capital or operating - how?
1:4 TT, BPO, 75%useful life, 90% FMV
And Determine Portion of the Rights
-PV of Rent Pmts>=90% Capital
-PV of Rent Pmts10% Capital or Operating
-PV of Rent Pmts
When PV of Rent Pmts of a leaseback are 10%, how is gain handled?
Defer gain up to PV of leaseback payments, recognize rest immediately.
-If capital lease, offset against depr exp
-If Op lease, offset against rent exp
How is a modification of a capital lease that converts it to an operating lease treated?
as a sale-leaseback
Explain impairment on lease
When Carrying Amount > Future Cash Flows
Then Carrying Amount - FV= Impairment Loss
Explain 2 types of Leases under IFRS
1. Finance Leases (instead of capital lease in GAAP): transfer substantially all of the rights and risks of ownership to the lessee, regardless of whether title is actually transferred.
2. Operating Leases: all other leases under IFRS
IFRS Rights of Ownership=
-Benefit of Profitable Operation over asset's economic life
-Benefit of Appreciation in Value or Realization of Residual Value
IFRS Risks of Ownership=
-Possibility of losses due to idle capacity or obsolescence
-Reductions in (profitable) returns due to changing economic conditions
How does a Lessor report a Gain on a sale of an Operating Lease?
Immediately & in Full as a Deferred Gain
Deferred Gain= Deferred Credit (same thing)