Leases

Question 2

What are the characteristics of a capital lease for a lessee?

Answer 2

OWNS
Ownership transfers at end of lease
Written option for bargain purch
90% of leased prop FV <= PV lease pmts
75%+ of asset Econ life committed in lease term

Question 3

How is a capital lease recorded?

Answer 3

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

Question 4

What footnote disclosures are required for a capital lease?

Answer 4

Future minimum rental commitments

By year – for 5 years

All remaining years as a group

Question 5

What are the requirements for a capital lease for a lessor?

Answer 5

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

Question 6

What are the characteristics of an operating lease for a lessee?

Answer 6

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.

Question 7

What are the characteristics of an operating lease for a LESSOR?

Answer 7

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

Question 8

What are the characteristics of a direct financing lease?

Answer 8

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

Principal amount increases with each payment

Carrying amount of Lease decreases

Question 9

How is a sale-leaseback recorded?

Answer 9

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

Question 10

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

Answer 10

Payments begin at the start of the lease period

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

Question 11

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

Answer 11

Payments begin after the end of the first year

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

Question 12

How to classify a rental lease

Answer 12

Lessee = operating
Lessor = operating

GAAP & IFRS

Question 13

Sale (in substance) classification for lease

Answer 13

Lessee = capital (GAAP), financing (IFRS)

Lessor = sales type/direct financing (GAAP), finance (IFRS)

Question 14

What are the characteristics of a financing lease to the lesse?

Answer 14

OWES FACS

• Lease transfers ownership
• Written bargain purchase option
• Major part of Econ life
• PV of min lease pmts amounts to at least substantially all of FV
• g & l from fluctuation in FV of residual accrue to the lessee
• ability to continue the lease for 2ndary pd at rent sub lower than market rent
• cancellable & losses associated are borne by lessee
• specialized nature that only lessee can use w/o modification

Question 15

What are the characteristics of a sales type/direct financing lease to the lessor?

Answer 15

LUC

• lessee “owns” leased prop
• uncertainties do not exist
• collectibility is reasonably predictable

Question 16

Capitalized cost (LCM)

Answer 16

O = PV pmts and req'd buyout
W = PV pmts and bargain buyout
N = PV pmts not optional buyout
S = PV pmts not optional buyout

Question 17

Dep rules for capitalized lease asset

Answer 17

O = over asset life (legal form)
W = same
N = over lease life (substance over form)
S = same

Question 18

How to classify subleases

Answer 18

Original. Subleases

1. Operating 1. Operating
2. Capital (OW). 2. Capital
3. Capital (NS) 3. Operating

Question 19

How to find life for dep calculation

Answer 19

GAAP
OW = asset life
NS = lease term

IFRS
Lesser of asset life or lease term

Question 20

What happens when the lease pmts begin later than inception date?

Answer 20

• spread the lease pmts evenly over the longer pd of time

Ex.
56 pmts @ 28,900 = 1,618,400
1,618,400/60 mo = 26,973
26,973 * number of mo for the year

Question 21

How to account for capital lease?

Sales type or direct financing

Answer 21

• recog int rev each yr; int rev decreases each yr

- NO dep or rent rev

Question 22

How to a account for operating lease?

Answer 22

Recognize rent rev each yr at same rate year to year