Week 5 - Leases

Question 1

What is a lease?

Answer 1

An agreement whereby one party conveys to another party in return for a payment or series of payments the right to use an asset for an agreed period of time.

Question 2

What is an operating lease?

Answer 2

A lease that does not transfer
substantially all the risks and rewards incidental
to ownership of an underlying asset.

Question 3

What is a finance lease?

Answer 3

A lease that transfers
substantially all the risks and rewards incidental
to ownership of an underlying asset (equivalent to having transferred the control over the asset to the lessee).

Question 4

Who is a lessor?

Answer 4

The owner of the asset and retains ownership
under the lease arrangement.

Question 5

What are the two types of lessor’s?

Answer 5

Financier: Lessor acquires the asset at fair value
which it then leases to lessee.
Manufacturer or Dealer: Lessor generally created
the asset which is already carried on its books at an
amount different that fair value.

Question 6

Who is a lessee?

Answer 6

The party that obtains the right to use the asset
(not ownership) in return for making a payment or a
series of payments to the lessor.

Question 7

How do you assess whether a contract conveys the right to control the use of an identified asset?

Answer 7

1. Assess the right to obtain substantially all of the economic benefits from use of the identified asset.
2. The right to direct the use of the identified asset.

Question 8

What are lease payments?

Answer 8

Fixed payments less any lease incentives.