12. Leases Flashcards
Should a lessee capitalize leasehold improvements under an operating lease?
Yes. The lessee should capitalize leasehold improvements regardless of the type of lease.
What is a minor leaseback?
A leaseback is a minor leaseback when the seller-lessee transfers substantially all the risks of ownership to the lessor. The seller-lessor reports the sale as a standalone transaction and recognizes any gain or loss immediately.
When should a seller-lessee defer a gain or loss from a sale-leaseback transaction?
When the seller-lessee retains the right to substantially all the remaining use of the property, the sale and leaseback are considered related transactions, and any gain from the sale is deferred and amortized over the life of the lease. The amortization reduces rent expense if the leaseback is an operating lease, and it reduces depreciation of the leased asset if the leaseback is a capital lease.
The seller-lessee recognizes any loss from the sale immediately. Losses are never deferred.
What’s the difference between a sales-type lease and a direct financing lease?
The difference is profit.
In a sales-type lease, the fair value of the leased property differs from the cost, and the difference is the lessor’s profit or loss.
In a direct financing lease, the PV of minimum lease payments equals the fair value of the property, and the lessor earns only interest income.
