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FAR - 5 > Capital Lease > Flashcards

Capital Lease Flashcards

1
Q

Basic

A

Dr. Asset; Cr. PV Liability upon execution of the transaction

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2
Q

youre going to take possession or keep this thing when the lease endds

A

purchase or ownerhip

transfers risks benefits of ownership

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3
Q

capital

A

US

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4
Q

Finance

A

IFRS

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5
Q

sales type or direct financing lease

A

called simply a financing lease under IFRS

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6
Q

sales type lease

A

results in a profit or loss to the landlord

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7
Q

direct financing lease

A

more like youre financing the purchase

no profit or loss

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8
Q

GAAP Lessee capital lease criteria -> buyer

A

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

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9
Q

N

A

example

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10
Q

Lease finance criteria for IFRS

A

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

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11
Q

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

A

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

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12
Q

Lessor can classify it as a capital lease while lessee can classify it as a operating lease

A

what?!

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13
Q

types- GAAP
IFRS: similar accounting just not called that way-

in all cased there is a transfer of benefits and risks in ownership

A

sale-type

two profits:

1) gain on sale
2) interest income

direct financing lease: one profit
1) interest income

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14
Q

Lessee capital lease announcing

GAAP and IFRS

A

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

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15
Q

Cost (PV of all min lease payments)

A

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

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16
Q

IFRS costs capitalized in amount

A

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

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17
Q

PV Tables to use

A

Periodic payment: actual lease payments

bargain purchase option or guaranteed residual: PV of lump sum

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18
Q

interest rate

A

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)

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19
Q

summary

A

on F5-14

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20
Q

example on page F5-15

A

1) qualify as a capital lease?

2) record JE for lessee

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21
Q

OWNS

A

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

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22
Q

N

A

compare FV and cost

cost includes including all rules

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23
Q

Depreciation expense on capitalized lease for the lessee because now you own asset

A

[capitalize leased asset- sv]/periods of benefit

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24
Q

period of benefit US GAAP

A

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

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25
Q

period of benefit IFRS

A

lesser of useful life or lease life

dont break

think of it as too many rules so IFRS was like whatever

26
Q

Lease amortization on lessee’s books

A

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!

27
Q

JE

A

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

28
Q

Lessee’s financial statement disclosure

A

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

29
Q

diff classification of operating and capital in IFRS and GAAP

A

specific % NS

30
Q

summary US GAAP

A

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

31
Q

IFRS Summary

A

same except:
1) Criteria different

2) direct costs include in asset and not in obligation
3) depreciation lesser of

32
Q

Lessor Accounting- GAAP and IFRS except IFRS calls it a financing lease

A

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

33
Q

unguaranteed residual value

A

estimated fair value at year end, its not guaranteed

34
Q

net investment = net principle

A

gross investment * PV

35
Q

interest rate

A

use implicit rate in the lease

36
Q

unearned interest revenue

expense it over time

A

contra
interest receivable

gross investment-net investment

37
Q

COGS- charged against income in the period in which the sale is recorded

A

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

38
Q

sales rev

A

cost+profit= SP = PV = FV

39
Q

cogs and sales are related to

A

actual cost

40
Q

interest payments

A

related to actual lease payments

41
Q

can calculate interest payments

A

using the same amortization table

start with net

42
Q

JE

A

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)

43
Q

Direct Financing Lease

seller (with all the LUC)

A

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)

44
Q

direct

A

when NO PROFIT

because COGS or Cost = Sale = PV = Carrying amount of receivable

45
Q

*sale lease back

A

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

46
Q

sale leaseback

A

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

47
Q

Excess profit on sale leaseback- US GAAP Value

A

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

48
Q

> 90%

A

leaseback > 90% of SP

Defer all gain and amortize with the lease asset

49
Q

10% to 90%

A

defer gain upto PV of min lease payments in case of operating lease and capitalized asset in case of a capital lease

50
Q

<10%

A

recognize gain or loss at the time of the sale leaseback nothing deferred

51
Q

comparing

A

PV of annual lease payments in case of operating lease

or capitalized asset

WITH

sale price

52
Q

Loss

A

real economic loss and artificial loss

53
Q

real economic loss

A

FV of the property at the time of sales leaseback < Book value

54
Q

artificial loss

A

sales price < fv, loss is deferred and amortized over leaseback period

55
Q

capital leaseback-> amortization of gain or loss

life of asset

A

any deferred gain or loss-> amortized in proportion to the amortization of the leased asset

56
Q

operating leaseback 0> amortization of gain or loss

life of lease

A

amortized in proportion to gross rental expense over the life of the lease

57
Q

summary

A

pg f5-26

58
Q

Examples

A

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

59
Q

middle

A

can be calculated using years too lease years/useful life

60
Q

Accounting by the seller/lessee (IFRS)

A

sales leaseback

finance leaseback: profit deferred amortized over lease

operating leaseback:
profit recognized

61
Q

sublease

A

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

FAR - 5 (4 decks)

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