Leases Flashcards
What types of leases are available to the lessor?
Operating or non-operating. Non-operating also includes sales type or direct financing.
What types of leases are available to the lessee?
Operating or capital leases
What is a capital lease?
It is a lease when the rights and risks of ownership have transferred from lessor to lessee. Lessee will recognize both an asset and liability at present value of the minimum lease payment.
What are the four criteria to a capital lease?
- TT - Title transfer 2. BPO - Bargain Purchase Option 3. 75% or more of estimated economic life of property at inception 4. Present value of MLP is >= 90% of the FMV of property at inception
If the lease occurs when the property is within the last 25% of the total estimated economic life of the property, which criteria will no longer be available?
75% and 90% criteria no longer available
What is not included in the MLP?
Contingent rents and executory costs
How should the lessee record a lease?
The lower of FMV or the PV of the MLP
When should the PV of the payments be based on the market borrowing rate?
If the lessee does not know the lessor’s impact rate and if the implicit rate is lower than the incremental borrowing rate.
What interest method is used for lease payments?
Effective interest method
Which interest rate does the lessee use for lease payment calculation?
Either the incremental borrowing rate or the implicit rate if both is known: 1) lessee know’s the lessor’s rate 2) implicit rate is lower than the incremental rate
Who depreciates the asset?
The lessee using the useful life of the asset
How does the lessee depreciate the asset?
If TT or BPO: ignore salvage value and depreciate over useful life. If 75/90: ignore salvage value and choose the shorter of useful life or lease term
What are the necessary disclosures that the lessee needs to make in their financials regarding capital leases?
- description of the leasing activities 2. gross amount of assets recorded under capital leases 3. MLP for each lease for the next 5 years and the total
What is a non-operating lease and how what are the criteria for it?
A non-operating lease is a “capital lease” for the lessor is either 1) sales-type or 2) direct financing. Criteria includes TT, BPO, 75 or 90 and: 1) collect ability is reasonably assured 2) measurable with no significant uncertainties
What is a sales type lease?
Includes profit/loss in period of sale and the interest revenue is earned over the life of the lease using effective interest method.
