Accounting for Leases

Question 1

How are the cash flows recognized for Operating Leases for Lessee and Lessor?

Answer 1

Straight line basis as periodic expense

Straight line basis as periodic rental income

Question 2

What is the treatment of a lease bonus in an operating lease?

Answer 2

It is a pre-payment (asset); should be deferred charged and amortized over life of the lease using Straight Line
(Example is Real estate commission)

Question 3

What are leasehold improvements?

Answer 3

Improvements made to the leased asset that when you return the asset the improvements stay with the asset.

Question 4

How are leasehold improvements treated?

Answer 4

Capitalized and depreciated
Depreciated by using the LESSER OF:
1) Lease life
2) Asset/improvement life

Question 5

How are refundable security deposits treated?

Answer 5

Asset on lessees books until refunded

Question 6

What does OWNS relate to?

Answer 6

Capital Lease:
O - Ownership transfers to lessee at end of lease
W - Written bargain purchase option exits (buy at < est FV)
N - Ninety % of leased property’s FV < or = to PV of the minimum lease payments
S - Seventy-five % of asset’s econ. life will be used in lease term

Question 7

True/False:

Minimum lease payments include the required periodic payments and the bargain purchase and/or guaranteed residual value.

Answer 7

TRUE

Question 8

Executory costs (maintenance, insurances, taxes, etc.) associated with a lease are:

Answer 8

EXCLUDED from the lease payments capitalization. They are expensed in period incurred.

Question 9

What interest rate is used when amortizing the lease liability?

Answer 9

The effective interest rate method

Question 10

Which interest rate is used when calculating the PV of the minimum lease payments?

Answer 10

Lesser of:

1) Lessor’s Implicit rate (if known)
2) Lessee’s incremental borrowing rate (rate available in the market)

Question 11

What life is used to depreciate a capital lease asset?

Answer 11

Lesser of:

1) Economic useful life
2) Life of lease

Question 12

What happens to the lease payable account if the bargain purchase is not included in the beginning PV of lease payments calculation?

Answer 12

The account will be zero at the end of the lease, but the lessee will still owe the amount for the bargain and there will be no liability associated with it.

Question 13

When should lessor recognize income from a nonrefundable lease bonus?

Answer 13

It is deferred revenue and should be recognized over the life of the lease (amortized)

Question 14

what is the depreciation life used for leasehold improvements?

Answer 14

Lesser of:

1) remaining life of lease
2) life of the improvement

Question 15

Under IFRS, how is gain or deferred gain determined?

Answer 15

Goes by the type of lease

1. Finance Lease - defer gain and amortize over the lease term
2. Operating Lease - recognized based on the leased asset’s CV fair value and Selling price

Question 16

Name the IFRS operating lease gain recognition basis

Answer 16

1. Sales Price = FV –> recognize immediately; no deferral
2. Sales price > Fair Value –> profit deferred and amortized over period the asset is used
3. Sales price < FV –> profit/loss recognized immediately except if loss is compensated for by future lease payments at below market. Then the loss should be deferred over period asset used

Question 17

If there is a transfer of title and the lease is noncancelable, what will the lessor do with interest revenue and depreciation expense?

Answer 17

1. interest revenue - recognize it when payments received

2. depreciation expense - NOTHING, the asset is off their books