Leases & Contingencies

Question 1

FAR Exam

How is a Capital Lease recorded?

Answer 1

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

Question 2

What footnote disclosures are required for a Capital Lease?

Answer 2

Future minimum rental commitments By year - for 5 years All remaining in aggregate

Question 3

What are the requirements for a Capital Lease for a lessor?

Answer 3

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

Question 4

What are the characteristics of an Operating Lease for a lessee?

Answer 4

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 5

What are the characteristics of an Operating Lease for a LESSOR?

Answer 5

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 6

What are the characteristics of a Direct Financing Lease?

Answer 6

No Profit! Interest Revenue (or expense for lessor) decreases with passage of time. Principal amount increases with each payment. Carrying amount of Lease decreases

Question 7

How is a sale-leaseback recorded?

Answer 7

Any profit on the sale is deferred and amortized. Exception: (1) If PV of lease payments is 10% or less of the asset’s FMV- the gain is recognized. (2) If PV of lease payments is greater than 10% of FMV and the lease is operating then all of the gain is recognized except the amount of the PV of the lease payments

Question 8

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

Answer 8

Payments begin at the start of the lease period.

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

Question 9

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

Answer 9

Payments begin after the end of the first year.

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

Question 10

What are the characteristics of a Capital Lease for a lessee?

Answer 10

T-T-BPO-75 or 90!
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

Question 11

A contingency for gain/loss that is reasonably possible should be disclosed, accrued or disclosed and accrued.

Answer 11

Disclosed - The nature of the contingency must be described with estimates in the notes.

Question 12

A Probable Loss contingency is?

Answer 12

A material contingent loss that is probable and can be estimated - if known at the balance sheet date, it must be accrued.

Question 13

Contingency that is reasonably possible is:

Answer 13

Disclosed only. NOT ACCRUED!!!

Question 14

IFRS - Contingency Factors for Disclosure

Answer 14

1) Reporting period in which the underlying cause of action occurred.
2) Probability of favorable outcome
3) Ability to make a reliable estimate of the amount of loss

** Does NOT include # of parties involved in a litigation.

Question 15

What are the components of the lease receivable for a lessor involved in a direct-financing lease?

Answer 15

1) Minimum lease payments plus residual value, and

2) Any unguaranteed residual value

Question 16

In a lease that is recorded as a sales-type lease by the lessor, interest revenue should be recognized…

Answer 16

Over the period of the lease using the effective-interest method.

Question 17

Rent should be report by the lessor as revenue in which type of lease?

Answer 17

Operating ONLY.

Direct Financing and sales-type leases only record interest revenue