Ch. 8 Leases Flashcards
What are included in the initial measurement of leases?
lease payments before the commencement date (less incentives), initial direct costs, estimates of costs to be incurred.
It is the present value of all future payments - if rate isn’t stated in the lease, it is the cost to borrow
What are the two different components of leases?
Fixed payments and variable payments.
What are variable payments?
Index or rate (inflation), future events, bargain purchase options, guaranteed residual value, unguaranteed residual value, termination penalties, non-lease component costs
What are the two methods that ROU assets can be measured using?
Cost and the revaluation model.
How are ROU assets depreciated?
It is depreciated at the lesser of: Lease terms and the assets useful life (mandatory if they obtain ownership at the end of it)
How are adjustments recognized against the ROU asset?
Using lease liabilities - ius, it needs to be remeasured if there are any changes or modifications.
What are the journal entires if you decides to recognize a BPO
The difference bewteen A/D and Asset is recorded backed out and then as an asset, the BPO (included in their lease liability), is then paid out in cash and unrecognized. Making it everything nice and clean
What do you record if a BPO is not recognized and is not used?
We do the same but instead of recognizing an asset, we recognize a loss on derecognition. The reason for this is because there is inherent benefits to a BPO and we decided not to use it for some reason. And then we would recognize a gain on the derecognition of the ROU asset, and this is the amount of the lease liability that we would have paid for the BPO. Since we aren’t paying it, and it was included into our lease liability, we’d have a gain.
Lessor POV - What are the criteria that Lessors use to determine if it is a finance lease or an operating lease?
- Title transfers to the lessee by the end of term
- Bargain pruchas option exists, and it is certain that they will use it.
- Lease term is at a duration that the lessee will receive substantially all the economic benefits derived from the use of the property
- PV of the minimum lease payments amounts to substantially all of the FV
- Asset is specialized in nature and only the lessee can use it without major modifications
What is a finance lease?
When majority of the benefits of the asset is transferred. So you would record receivable, COGS, revenue and then derecognize the asset (lease receivable is also called net investment in lease)
what are the journal entires for a finance lease (Lessor side)?
LEase receivable cogs rev inv cash lease receivable/net investment leas
What are lease inducements
These are assets/liabilities that are recognized over the life of the lease. These may be reductions in payments or other stuff
What are leaseback transactions?
When an entity transfers an asset to another entity, and then they ask to lease it from them
Explain how to record a leaseback transaction in the perspective of the seller-lessee
When they sell the asset, there is a gain. But the entirety of the gain is not realized since a portion of it is transferred to the buyer (through the lease).
Therefore, we need to calculate the their portion of the claim transferred: PV of Lease - FV of the entire thing / FV given up. This is the buyer-lessor proportion of the claim.
Next, we’d need to recognize the ROU asset (its a finance lease), this is calculated as: PV lof Lease/FV given up x Book value given up
The A/D, Asset, and lease liability are all the same
What are the differences between IFRS and ASPE?
All leases are capitalized – recognize a ROU asset and lease liability (other than short term ones or low value ones). – LESSEE
LESSOR – Leases are classified as a finance or operating lease.
Under ASPE:
Lease are capital or operating – LESSEEE
Leases are classified as capital or operating under criteria - LESSOR
