Capital Lease Flashcards
Basic
Dr. Asset; Cr. PV Liability upon execution of the transaction
youre going to take possession or keep this thing when the lease endds
purchase or ownerhip
transfers risks benefits of ownership
capital
US
Finance
IFRS
sales type or direct financing lease
called simply a financing lease under IFRS
sales type lease
results in a profit or loss to the landlord
direct financing lease
more like youre financing the purchase
no profit or loss
GAAP Lessee capital lease criteria -> buyer
Dr. Fixed Asset
Cr. Lease Obligation
Need to meet 1 or the four
OWNS
3 and 4 are substance over form-> capital lease even if you’re not going to keep the car
1) Ownership transfers at the end of the lease
2) Written option for bargain purchase - he has the option to buy it at the end of the lease
3) 90% of the fair value of the property < or equal to PV of lease payments (hint: if you’re paying os much for it in lease payments you want to trat it like its yours) (EVEN if youre not going to keep the car)
4) 75% or more of the asset’s economic life is being committed to the lease term
greater than or equal to
N
example
Lease finance criteria for IFRS
OWNS: except for the numbers; they should just be substantial
1 of these
F-> fluctuation in the FV of the asset and gains and losses from that are accrued to the lessee
A-> ability to continue lease for secondary period at rent substantially lower than market rent
c-> lessee can cancel the lease anytime and the risk of that loss is borne by the lessee
S-> leased assets are so specialized that only the lessee can use them without modification
US GAAP: Lessor- criteria
Lucky guy and we still hate him and he needs all Luck
IFRS: Lessor- same criteria (FACS and OWNS) as lessee so almost in both case will be classified in the same way
ALL of the following conditions should be met
LUC
Lessee owns the leased property according to OWNS
uncertainties about unreimbursed costs in the future does not exist-> earnigns process is virtually complete
collectibility of lease payments can be reasonably predicted
Lessor can classify it as a capital lease while lessee can classify it as a operating lease
what?!
types- GAAP
IFRS: similar accounting just not called that way-
in all cased there is a transfer of benefits and risks in ownership
sale-type
two profits:
1) gain on sale
2) interest income
direct financing lease: one profit
1) interest income
Lessee capital lease announcing
GAAP and IFRS
Dr. Fixed Asset
Cr. Liab
Amount of Fixed asset:
Lesser of FV of asset at inception of lease or cost which is the PV of all min lease payments
Cost (PV of all min lease payments)
under cost or the PV of all min lease payments:
include ALL payments that the lesee is obligated to make
1) required payments
2) bargain purchase options- required or guaranteed
3) guaranteed residual value- amount guaranteed by the user to the owner for the estimated residual value of the asset at the end of the lease term
Exclude:
1) executory costs that can be paid by anyone:
like oil change, or we’ll include a min fee and you can come in and get your tyres fixed etc.
expensed as occurr (r&m tax insurance etc)
2) optional buyout not a required bargain to purchase you can refuse it-> excluded
IFRS costs capitalized in amount
initial direct costs of the lease paid by the buyer are added to the amount recognized as a finance lease asset
dr. asset
cr. obligation (same rules)
cr. cash (indirect costs)
at lease inception the amount of the lessee’s asset and lessor’s obligation MIGHT be different -> lease asset is not equal to liab
PV Tables to use
Periodic payment: actual lease payments
bargain purchase option or guaranteed residual: PV of lump sum
interest rate
lesser of rate implicit in the lease or lesee’s incremental borrowing rate which is the rate available in the market to the lessee (not prime)
summary
on F5-14
example on page F5-15
1) qualify as a capital lease?
2) record JE for lessee
OWNS
Order matters; so if you meet more than one crietria use
O if not then
W if not then
S if not then
N
because N is the most difficult to calculate
N
compare FV and cost
cost includes including all rules
Depreciation expense on capitalized lease for the lessee because now you own asset
[capitalize leased asset- sv]/periods of benefit
period of benefit US GAAP
OW-> life of the asset
NS-> lease term
logically you’re not going to own it after under NS so why depreciate it over useful life or extra time period
period of benefit IFRS
lesser of useful life or lease life
dont break
think of it as too many rules so IFRS was like whatever
Lease amortization on lessee’s books
amortization table on page f5-18
like our bonds table
in the last year you want the carrying value of the lease obligation to be 0 so you plug in the interest there
you’ll have to make payment at the beginning of the year
if annuity due then first payment is not interest payment
you start the liability with the what you put in the asset or obligation and then reduce it each year
total of difference column = liability or asset initially recorded look at the example!
JE
Jan 1 yr 1
1) Record obligation
Dr. Asset
Cr. Obligation
2) record payment if annuity due
dr. obligation
cr. cash
Dec 31 yr 1
3) record interest
dr. interest exp
cr. obligation
4) record dep
dr. dep expense
cr. acc dep
Jan 1 yr 2
5) pay lease-> paying interest and part of principle
dr. interest payable
dr. obligations
cr. cash
only decrease obligation when you are actually paying princple
Lessee’s financial statement disclosure
disclose everything
the more the better
shouldn’t talk about items that haven’t been recognized yet and not repeat
- 5 year rule for capital lease: future min lease payments in the aggregate and for each of the next five years show deductions for 1) executory costs; 2) including any profit there on and the 3) min amount of imputed interest
operating too:
min future rental payments in total and for each of the next five years
diff classification of operating and capital in IFRS and GAAP
specific % NS
summary US GAAP
Capitalize:
1) Criteria
2) Lesser of :
1) Cost = PV Future lease payments
a) Include:
guaranteed residual value
b) bargain purchase if applicable
2) Exclude: executory costs of insurance, taxes, r&m
3) Interest rate:
lesser of
OR
FV: given
Depreciation:
OW-> useful life
NS-> lease
IFRS Summary
same except:
1) Criteria different
2) direct costs include in asset and not in obligation
3) depreciation lesser of
Lessor Accounting- GAAP and IFRS except IFRS calls it a financing lease
sales type financing lease
with all the LUC- dbt luc
2 gains:
gain on sale
interest income
Gross investment= total lease payments (bargain purchase option+guaranteed residual value)+unguaranteed residual value
unguaranteed residual value
estimated fair value at year end, its not guaranteed
net investment = net principle
gross investment * PV
interest rate
use implicit rate in the lease
unearned interest revenue
expense it over time
contra
interest receivable
gross investment-net investment
COGS- charged against income in the period in which the sale is recorded
cost of asset (+direct costs) - PV of unguaranteed residual value
this is N/S because i’m going to get my car back and so I’m going to get the unguaranteed residual value back
so what is my cost its just the difference between cost and pv of unguaranteed residual value
sales rev
cost+profit= SP = PV = FV
cogs and sales are related to
actual cost
interest payments
related to actual lease payments
can calculate interest payments
using the same amortization table
start with net
JE
SALE:
Dr. COGS (cost+direct)
Cr. Inventory (Assets sold)
Dr. Lease payment receivable (gross->)
Cr. Unearned Interest Income (diff gross and net)
Cr. Sales
totals end of term
income:
profit (sales-cogs)
total interest income (unearned rev account)
Direct Financing Lease
seller (with all the LUC)
only interest income
calculate the same way
dr. lease payment receivable (gross investment)
cr. unearned interest rev (diff net and gross, contra)
cr. asset (Sale price)
direct
when NO PROFIT
because COGS or Cost = Sale = PV = Carrying amount of receivable
*sale lease back
i sell my building to you
and then immediately I will lease it from you because i need to stay here
i sold it to you and i made a profit on sale but i have to give it back to you in the form of lease payments over the next few years so the earnings process is not virtually complete and i still have a secondary obligation to you
defer gain
say gain is 2m and when i lease say i have to give you back 800,000 in total in terms of lease 0> the 1,2 million I can put in my pocket and keep forever
to the limit when you have to give back
if however i sell it to you at a loss and i lease it back-> rule of conservatism book loss immediately
sale leaseback
general rule: 1) over 90% loan (lease payments total are more than 90% of the SP- its like a mortgage so defer all gain and you use it as an offset to the lease payments)
2) 10% to 90% - rule
3) 0 to 10% - ignore
recognize all gain immediately, record minor rent back for a very small amount of time
Excess profit on sale leaseback- US GAAP Value
RENT BACK THEREFORE you recognize rev not gain
Operating:
(Sales Price)-(Asset NBV)=(PV min lease payments)= excess gain can recognize that as rev
capital lease excess profit:
sales price - asset NBV
= tentative gain - leaseback asset = excess gain
OWNS back -> lease back because the ownsership will transfers back to ther person who sold it
> 90%
leaseback > 90% of SP
Defer all gain and amortize with the lease asset
10% to 90%
defer gain upto PV of min lease payments in case of operating lease and capitalized asset in case of a capital lease
<10%
recognize gain or loss at the time of the sale leaseback nothing deferred
comparing
PV of annual lease payments in case of operating lease
or capitalized asset
WITH
sale price
Loss
real economic loss and artificial loss
real economic loss
FV of the property at the time of sales leaseback < Book value
artificial loss
sales price < fv, loss is deferred and amortized over leaseback period
capital leaseback-> amortization of gain or loss
life of asset
any deferred gain or loss-> amortized in proportion to the amortization of the leased asset
operating leaseback 0> amortization of gain or loss
life of lease
amortized in proportion to gross rental expense over the life of the lease
summary
pg f5-26
Examples
1) nature of lease
pv of rental or lease payment
or asset (min lease payments + including guaranteed resale and guaranteed residual value)
2) major minor or middle
% sale price and the 1 part
3) defer fully partially or no
middle
can be calculated using years too lease years/useful life
Accounting by the seller/lessee (IFRS)
sales leaseback
finance leaseback: profit deferred amortized over lease
operating leaseback:
profit recognized
sublease
if i am renting and now i am subleasing to someone else
then if my original lease was operating so the lease with by sublesor was operating
original capital lease
if due to OW then sublease is capital lease
if due to NW sublease will be operating
