8 - Leases Pt. 2 Flashcards
Lessor classifies each of its leases as either
Finance lease or Operating lease
Transfers substantially all the risks and rewards incidental to ownership of underlying asset
Finance lease
Finance lease is also called
Capital lease
Lease does not transfer substantially all the risks and rewards incidental to ownership of underlying asset
Operating lease
Include the possibilities of losses from idle capacity or technological obsolescence because of changing economic conditions
Risks
Represented by expectation of profitable operation over asset’s economic life and gain from appreciation in value
Rewards
Indicators of a finance lease (5):
- transfer of ownership
- bargain purchase option (BPO)
- lease term is at least 75% of the useful life of the leased asset
- PV of lease payments is at least 90% of the fair value of the leased asset @ inception date
- leased asset is of specialized nature
Does not provide specific guidance in determining what constitutes a “major part”
PFRS 16
Under FAS and SFAS No. 13 of US GAAP, lease term at least ___ constitutes a major part of the economic life of the asset
at least 75%
Either:
1. Period which asset is expected to be economically usable
2. Number of production expected to be obtained from the asset by one or more users.
Economic life
Other indicators of finance lease (3):
a. transfer of risk
b. transfer of risks & rewards
c. transfer of reward
Lease classifications are made at?
inception date
Is the earlier of date of lease agreement and date of commitment by the parties
Inception date
Date where lessor makes and underlying asset available for use by a lessee
Commencement date
Date of initial recognition for the lease
Commencement date
Lessor recognizes a financial lease as _____ measured at amount equal to _____ in the lease
receivable; net investment
Lessor transfers all risks & rewards to lessee and derecognizes the leased asset and recognizes ___
Finance lease receivable
Treated as repayment of principal and finance income
Finance lease receivable
Sum of lease payments receivable by lessor under finance lease and any unguaranteed residual value
Gross investment in the lease
Gross investment in the lease discounted @ interest rate implicit in the lease
Net investment in the lease
Difference between gross investment in the lease & net investment in the lease
Unearned interest income
Net investment is measured using
interest rate implicit in the lease
Net lease receivable is subsequently measured
@ amortized cost similar to financial asset
Lessor does not recognize depreciation because the leased asset is
already derecognized
Incremental costs of obtaining a lease that would not have been incurred if lease had not been obtained (except for costs incurred by a manufacturer/dealer)
Initial direct costs
Includes commission, legal fees, internal costs and excludes general overheads
Initial direct costs
Rate of interest that causes the present value of lease payments & unguaranteed residual value = sum of fair value of underlying asset & initial direct costs
Interest rate implicit in the lease
Initial direct costs are ____ except direct costs incurred by a manufacturer/dealer
capitalized
Classification of finance lease by the lessor:
- Direct financing lease
- Sales type lease
Lessor acquires assets and leases them with intention of generating income through interest
Direct financing lease
Lessor is neither the manufacturer or dealer
Direct financing lease
Lessor is the manufacturer or dealer and uses leasing as means of marketing its products; lessor often provides customers a choice of buying or leasing an asset
Sales type lease
Sales type is accounted for like direct financing except it recognizes the following: (3)
- Sales revenue
- Cost of sales
- Gross profit
Lower of present value of lease payments discounted using a market rate and fair value of the asset
Sales revenue
Equal to cost or underlying asset less present value of unguaranteed residual value
Cost of sale
Difference between revenue and cost of sale
Gross profit
Costs incurred in obtaining a sales type lease are recognized as _____ and are excluded from initial direct costs and measurement of net investment
expense
What does lessor account for residual value?
Both guaranteed and unguaranteed residual values
If residual value is guaranteed, present value of guaranteed res. val. is
added to sales
If residual value is unguaranteed, present value of unguaranteed res. val. is
deducted from cost of sales
