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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?
By Lessor
By Lessee

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)

Day 1
DR Leased Asset
CR Lease Liability
1st payment
DR Lease Liability
CR Cash
Payment @ YE
DR Lease Liability
DR Interest Expense
CR Cash
DR Depr Exp
CR Accum Depr


Operating Lease - Describe Lessor's responsibilities

Op Lease, Lessor:
-Depreciates asset,
-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.


Define Sales-leaseback

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)


Sales Leaseback, Name type of Lease when
PV of Pmts >= to 90% FMV

Capital Leaseback
Defer all gain and offset with Depr Exp