21.01 Lessee Accounting Flashcards
What is the definition oaf a lease?
ASC 842 defines a lease as “a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.”
What is the definition of control?
A business must be able to achieve “substantially all” of the economic benefits from the asset’s use and direct its use throughout the contract period.
What are the classifications of a lease?
From the perspective of a lessee, long-term (i.e. longer than 12 months) leases can be classified as finance or operating.
What are the criteria for a lease to be classified as a finance lease?
Specialized lease property with no foreseeable alternative use to lessor at end of lease term? Yes - finance lease
Purchase option reasonably certain to be exercised? Yes - finance lease
Transfers title at end of lease? Yes - finance lease
Lease term major part of remaining economic life (>75%)? Yes - finance lease
Present value of lease payments substantially all of leased item’s fair value (>90%)? Yes - finance lease
If no to all, operating lease.
What is the lease term?
The lease term is the period of time during which the lessee can reasonably be expected to continue leasing the asset. It begins at the commencement date and is the sum of the following: initial lease term (the original noncancelable term of the lease that does not include any renewal periods); periods for which a renewal option is likely to be exercised by the lessee; periods for which an option to terminate is unlikely to be exercised; periods for which a renewal option is controlled by the lessor.
When is a lessee required to recognize assets and liabilities for a lease?
For any lease with a term exceeding 12 months.
What are fixed lease payments?
Amount the lessee is required to pay over the term of the lease, minus any lease incentives paid/payable to the lessee.
What are variable lease payments?
Payments that may change over the course of the lease. Change in payment may be linked to an external market rate, a performance measure, or a usage measure.
What is a purchase option?
Option whereby the lessee will have an opportunity in the future to purchase the asset.
What is residual value?
Estimated value of a leased asset at the end of the lease term.
What is a residual value guarantee?
The lessee guarantees that the leased asset’s residual value will be at least equal to the lessor’s expected value at the end of the lease term.
What is a nonrefundable deposit?
Fee paid by the lessee to secure the use of the leased asset; once the lessor receives the fee, the asset’s availability is no longer advertised.
What is an upfront fee?
Fees or costs incurred as a result of execution of the lease.
What are the components of an operating lease?
Right-of-use asset and lease liability; prepaid rent; refundable security deposit; leasehold improvements; lease (rent) expense.
What is a finance lease?
A finance lease is generally one in which the rights and risks of ownership have essentially transferred from the lessor to the lessee. In substance, it is a purchase, although in form it is considered a lease.
