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FAR 5 > Accounting For Leases > Flashcards

Accounting For Leases Flashcards

1
Q

Operating Lease

A

Rental agreement
Includes a lessor, who collects rent, and a lessee, who uses the leased asset and pays periodic rent for such use. No transfer of ownership, or any risk or benefit of ownership.

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2
Q

Lease Rent Expense

A

Lessee records rent expense over the lease term, usually on a straight-line basis unless other methods warranted.
DR: Rent expense
CR: Cash/rent payable

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3
Q

Lease Bonus (prepayment)

A

Lease bonus for future expenses should be classified as an asset (deferred charge) and amortized using the straight-line method over the life of the lease.
- commission paid to real estate agent

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4
Q

Leasehold Improvements

A

One that is permanently affixed to the property and reverts back to the lessor at the termination of the lease.

  • capitalized and added to PPE or intangible assets
  • depreciation (amortized) over the lesser of: lease life or asset/improvement life
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5
Q

Rent Kicker

A

Premium rent payment required for specific events–> periodic expense

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6
Q

Refundable Security Deposit

A

Reported as an asset until refunded by the lessor.

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7
Q

Free or Reduced Rent Consideration

A

If consideration (free rental months or reduced rental charge at beginning) is part of the package, lessee must take total rent expense to be paid for the entire lease term and divide it evenly over each period (matching principle).

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8
Q

Fixed Asset - Lessor

A

The cost of the property is included in the lessor’s PPE.

- Depreciation: over the asset’s useful life

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9
Q

Security Deposits

A
  • Nonrefundable: deferred by the lessor (unearned rev) and capitalized by the lessee (prepaid rent expense) until the lessor considers the deposit earned.
  • Refundable: Treat as a receivable by the lessee and a liability by the lessor until the deposit is refunded to the lessee.
    DR: Cash
    CR: Refundable Deposit
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10
Q

Lessee (buyer) Capital Lease Criteria (GAAP)

A

Must meet one condition (OWNS) to capitalize:
O - Ownership transfers at end of lease
W - Written option for bargain purchase
N - Ninety (90%) percent of leased property FV = PV of lease payments
S - Seventy-five (75%) percent or more of asset economic life is being committed in lease term

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11
Q

Lessee Finance Lease Criteria (IFRS)

A

Meet at least one condition (OWES FACS):
O - The lease transfers ownership
W - The lease contains a written bargain purchase option
E - The lease term is for the major part of the economic life of the asset even if title not passed
S - The present value…substantially all of the FV
F - G/L from the fluctuation in the FV of the residual accrue to the lessee
A - Lessee has the ability to continue the lease for a secondary period at a rent substantially lower than market rent.
C - Lessee can cancel the lease and the lessor’s losses associated w/the cancelation are borne by the lessee
S - Leased assets are of such a specialized nature that only the lessee can use them w/out modification.

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12
Q

Lessor (Seller) - Sales-Type/Direct Financing Type Criteria (GAAP)

A

Must meet all three conditions (need all the LUC):
L - Lessee “owns” the leased property
U - Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor
C - Collectability of the lease payments is reasonably predictable.

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13
Q

Recording the Lease - Capitalized Amount

A

The lessee records the lease as an asset and a liability at the lower (lesser) of:

  • Fair value of the asset at the inception of the lease
  • Cost = present value of the minimum lease payments
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14
Q

Interest Rate

A

When calculating the present value of the minimum lease payments, the lessee uses the lower (lesser) of the:

  • Rate implicit in the lease (if known)
  • Lessee’s incremental borrowing rate (not prime)
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15
Q

Period of Benefit (Depreciable Life) - GAAP

A
  • Under Ownership Transfer and Written Bargain: use estimated economic life of the asset.
  • Under the 95% FV and 75% Life rules: use the lease term.
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16
Q

Period of Benefit (Depreciable Life) - IFRS

A

The depreciation period is the shorter (lesser) of the lease term and the useful life of the asset.

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17
Q

Gross Investment (Sales-Type/Finance Lease)

A

Lease Payment
+ Unguaranteed residual value (est. FV at end)
= Gross Investment

2 Profits: Gain on sale AND Interest Income
Recorded as Lease Payments Receivable

18
Q

Net Investment (Sales-Type/Finance Lease)

A

Gross Investment
x PV
= Net Investment/Principal

19
Q

Unearned Interest Revenue (Sales-Type/Finance Lease)

A

Gross Investment
- Net Investment
= Unearned interest revenue/future interest

Contra-lease receivable

20
Q

Cost of Goods Sold (Sales-Type/Finance Lease)

A

Cost of Asset (what it sold for)
- PV Unguaranteed residual value (what you get back)
= COGS/net given up

21
Q

Sales Revenue (Sales-Type/Finance Lease)

A
  • Present value of the min. lease payments is recorded as sales revenue.
22
Q

Gross Investment (Direct Financing/Finance Lease)

A

Lease Payment
+ Unguaranteed residual value
= Gross Investment

1 Profit: Interest Income

23
Q

Net Investment (Direct Financing/Finance Lease)

A

Gross Investment
x PV
= Net Investment/Principal

24
Q

Unearned Interest Revenue (Direct Financing/Finance Lease)

A

Gross Investment
- Net Investment
= Unearned Interest Revenue/Future Interest

25
Q

Rule for Direct Financing Lease

A

PV = Carrying amt of receivable = Cost of asset sold

26
Q

Rule for Sales-Type Lease

A

Cost
+ Profit
= PV = SP = FV
* when sales price not given

27
Q

Sale-Leaseback

A

The owner of a property (seller-lessee) sells the property and simultaneously leases it back from the purchaser-lessor.

General Rule:

  • Over 90% = Loan
  • 10-90% = Rules
  • <10% = Ignore
28
Q

Operating Lease Excess Profit (rent-back)

A 
Sale Price
- Asset NBV
= Tentative Gain
- PV min. lease payment
= Excess gain
29
Q

Capital Lease Excess Profit (owns-back)

A

Recorded amt of the leaseback asset is the lesser of:

  • FV of the leased property, or
  • PV of the min lease payments
Sale Price
- Asset NBV
= Tentative gain
- Leaseback asset
= Excess Gain
30
Q

Amount of Deferred Gain (by seller/lessee)

A

Determined by the retained rights to remaining use of the “leaseback” property. The rights to the remaining use of the property are determined by the PV of rent payments paid by the seller-lessee.

31
Q

“Substantially All” Rights Retained

A

PV of the rent payments is equal to or greater than 90% of the FV of the property. Usually capital leases.
Over 90% - major
Defer all gain and amortize with the leased asset.

32
Q

Rights retained are < “Substantially All” but > “Minor”

A

Either capital or operating leases.
10-90% - middle
Defer gain up to the PV of the min leaseback payments (operating) or capitalized asset (capital). Gain in excess of this amt is recognized immediately.

33
Q

Minor Portion of Rights Retained by Seller-Lessee

A

Operating Leases.
0-10% - minor
Recognize gain or loss at the time of the sale-leaseback transaction. Gains are not deferred.

34
Q

Real Economic Loss

A

Recognized immediately.

FV of the property at the time of the sale-leaseback is less than BV.

35
Q

Artificial Loss

A

When the sales price is below the FV, the loss is deferred and amortized over the leaseback period.

36
Q

Capital Leaseback - Amortization of Deferred Gain

A

Deferred gain or loss is amortized in proportion to the amortization of the leased asset.

37
Q

Operating Leaseback - Amortization of Deferred Gain

A

Any deferred gain or loss is amortized in proportion to the gross rental expense over the life of the lease.

38
Q

Finance Lease (Sale-Leaseback) - IFRS

A

Profit from the sale-leaseback transaction is deferred and amortized over the lease term.

39
Q

Operating Lease (Sale-Leaseback) - IFRS

A

Profit or loss from the sale-leaseback transaction is recognized based on the leased asset’s carrying amt, FV, and selling price.

40
Q

Subleases - Original Lease = Operating Lease

A

If the original lease was an operating lease, the sublease is also an operating lease.

41
Q

Subleases - Original Lease = Capital Lease

A

If the original lease was a capital lease due to:
- Ownership Transfer (O)
- Written bargain purchase option (W)
Then the sublease is a capital lease.

If the original lease was a capital lease due to:
- 95% FV (N)
- 75% of life (S)
Then the sublease will be an operating lease unless it meets one of the capital lease requirements.

FAR 5 (3 decks)

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