Transactions - Lessee Accounting Flashcards
(22 cards)
What does ASU 2016-02 Cover?
ASU 2016-02 covers lease contracts, giving customers (lessees) the right to direct (control) the use of the identified assets (PPE) and obtain substantially all economic benefits for a period of time.
What does ASU 2016-02 not cover?
PPE does not include the following below:
Intangible assets
Exploring for minerals, gas, oil, etc.
Biological assets
Inventory
Assets under construction
How many years of minimum annual payments does the financial statement notes need to show?
5 Years with the rest of the years being calculated based on an aggregate amount.
How do you calculate the aggregate amount of minimum annual payments after subtracting the FS Notes amount?
Total Lease Years - Cumulative Years to Date - Minimum annual payments FS Notes Amount (5 years)
Multiple this by the minimum annual payments amount.
Example:
100,000 Min annual payment amount
10 year lease life - 3 years with balance sheet ending year 3 - 5 = 2
2 X 100,000 = 200,000
Finance Lease Qualifying Criteria (ASC 842)
A finance lease must meet one of the following below:
Present value equal to or exceeds substantially all (90%) of the FV.
Reasonably certain option to purchase
A major part of the economic life is used (75% at least)
Transfer of ownership at lease end
Specialized nature leading to no alternative use to the lesser at lease end
Straight Line Depreciable Basis Formula
Asset Value - Salvage Value (not purchase option amount) / useful life of the asset (Estimate can be used if reasonably sure lessee will own the asset at lease end).
What are the two expenses related to a Finance Lease?
Depreciation or Amortization/Interest Expense
What does Depreciation/Amortization do within a Finance Lease?
Brings down the lease liability or principal of the lease.
What does Interest Expense do within a Finance Lease?
Calculable interest amount related to the lease (typically moving down as the lease liability or principal shrinks).
What are examples that disqualify as a lease contract?
Non-distinctive physical asset, non-fixed/specified space or asset allowing for change by the lessor, changeable by the lessor when economically beneficial.
How is an Annuity Due within a Finance Lease identified?
At the beginning of the year, annual minimum payments are due.
How is an Ordinary Annuity Identified within a Finance Lease?
At the end of the year, minimum annual payments are due.
How do you calculate Rent Expense Bonus within a Operating Lease?
Amortize the bonus over the lease term and add it to the annual rent payments and sales premium (if any)
Example: A 10-year lease with a $ 10,000 bonus upon execution would result in $ 1,000 per year being added to the rent expense.
What is a high sales premium within a Rent Expense Operating Lease?
Premium based on sales amount at the end of the year, based on a provision within the operating lease contract (Cannot be amortized since sales change every year).
For example, an additional 10% premium on rent for office space if sales reach over $ 100,000.
Sales = 110,000
Premium Difference = 11,000
High Sales Premium = 1,100
How to classify a lease that has a renewal option at market rates, concludes within the needed timeframe usage wise (warehouse example), and has the short lease exception standard (12 months or less)?
Operating lease with lease payments as an expense only, using the straight-line depreciable method.
What is a reasonably executable (bargain) purchase option at the end of a finance lease?
One where the estimated residual value exceeds the purchase option amounts at the end of the year.
Example:
Purchase amount = 10,000
Estimated Value @ Lease Term End = 20,000
How is a reasonable executable (bargain) purchase option treated when calculating the beginning lease liability within a finance lease?
If the PV purchase option amount is a bargain, add it to the lease liability with the PV of the minimum annual payments.
A bargain, meaning the estimated residual value is more than the purchase price, making it reasonably expected that the lessee will purchase the assets at lease end.
Reasonable bargain purchase option calculation/formula?
Purchase options at a bargain price that is lower than the expected residual value formulas are as follows
Purchase Option X the present value of $1
Add it to the PV of minimum annual payments.
Example:
Purchase Amount = 10,000
Estimated Value @ Lease Term End = 20,000
Present Value of $1 = 0.255
Purchase Amount PV = 2,550
Minimum Annual Payments = 11,000
Total Lease Liability @ Inception = 13,550
How do you calculate PV of minimum annual payments @ inception of finance lease?
Determine if it is an Annuity due or an ordinary annuity.
Determine the implied interest rate, specified interest rate, or incremental borrowing interest rate in that order.
Multiply the present value factor by the minimum annual payment amounts.
What does not qualify as a lease payment (excluding and essentially not a part of the lease payment)?
Variable lease payments are not specified to an index or rate and guarantee the lessor’s debt.
What qualifies as a lease payment?
Substance-based Fixed payments (based on sales or minimum amount
Variable payments dependent on a rate or index
Payments with renewal, termination, or exercise of purchase options.
Special purpose entities’ fees paid by the lessee to the owner
Residual value guarantee
How to calculate principal payments vs interest payments within a finance lease?
Interest Expense = Financial Lease Liability - Minimum Annual Payments X Implicit rate (specified or incremental if implicit is not given).
Principal payments = Minimum Annual Payments - Interest Expense (always subtract interest expense from minimum annual payments to allocate principal payment amount)
