Chapter 4 - Leases : lessor accounting Flashcards
Lease payments - Operating Leases
Under operating leases, lease payments should be recognised as income on either a straight line basis or another systematic basis.
Finance Lease Criteria
S - underlying asset is of such specialised nature that only the lessee can use it without major modifications
T- lease transfers ownership of the underlying asset to the lessee by the end of the lease term
O- lessee has the option to purchase the underlying asset as a price sufficiently lower than fair value at the exercise date that it is reasonably certain at the inception date that the option will be exercised
M- lease term is for major part of the underlying assets economic life
P-present value of lease payments at the inception date amounts to at least substantially all of the fair value for the underlying asset
Operating lease
A lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset
Finance lease
A lease that ransfers substantially all the risks and rewards incidental to ownership of an underlying asset
Unguaranteed residual value
That portion of the residual value of the underlying asset,the realisation of which by a lessor is not assured or is guaranteed solely by a party related to the lessor
lessor
an entity that provides the right to use an underlying asset for a period of time in exchange for consideration
lessee
an enitity that obtains the right to use an underlying asset for a period of time in exchange for consideration
lease
A contract or part of a contract that conveys the right to use an asset for a period of time in exchange for consideration
Lease term
The non-cancellable period for which a lessee has the right to use an underlying asset,together with both:
a) periods covered by an option to extend the lease if the lessee is reasonably certain to excerise that option and
b)periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise the option
Identifying a lease
- Right to control
=obtain substantially all economic benefits
=Direct use of asset
-Identified asset
=may be portion of asset
=supplier has no substantive substitution rights
-Period of time
=May be described in terms of asset use
=May be for portion of contract term
Lessor Accounting: Finance Lease
Classified as a finance lease if one or more apply:
Transfers substantially all the risks and rewards associated with the asset to the lessee
Lessee has the option to purchase the asset < expected fair value.
Reasonably certain the option will be exercised.
Present value of the lease payments amounts to all of the fair value of the asset.
Specialised assets that can only be used by the lessee without major changes.
Cancelled lease - Lessee compensates Lessor
Gains and losses from fluctuations in the fair value falls on the lessee.
Lessee can continue the lease for a secondary period for a rate substantially lower than market value.
Notes:
Asset de-recognised in financial accounts
Lease receivable is recognised as the right to receive payments from the lessee.
Lessor Accounting: Operating Lease
Classified as a finance lease if does not fit finance lease criteria.
Risk and rewards have not been transferred over to the lessee ( i.e. responsibility for maintenance)
Option for purchase at end of lease is not
Asset remains in financial statements and payments are recognised as rental income in SPL
Lessor accounting: Finance Lease Recognition
Initial Recognition - Net Investment Value (NIV)
Fixed Payments
Index or rate dependent variable payments at the lease commencement date (@ implicit rate of interest)
Residual value guarantees
Unguaranteed residual values
Purchase options that are reasonably certain to be exercised
Termination penalties.
Initial Recognition Journal Entries
Dr Lease Receivable x,xxx (NIV)
Cr PPE x,xxx (NBV of asset)
(Dr) / Cr P/L x,xxx (Balancing Value)
NIV - NBV = Balancing Value (Loss Dr) / Gain Cr
Subsequent Recognition
To calculate the remaining receivables balance will require a table
Bal b/f + interest % - (Payments amount) = Bal c/f.
Subsequent Recognition Journal Entries
Dr Cash [Payments Amount]
Cr Lease Receivable
Lessor Accounting: Operating Lease Recognition
Initial Recognition
Leave asset in the SFP
Recognise the lease payments as income on the P/L in a straight line basis over the lease term.
Any costs in negotiating the lease are added to the underlying asset.
Asset depreciated as normal in accordance with IAS16 - PPE.
Subsequent recognition
How much lease income to recognise each year?
- [(annual payments * lease term)+ one-off payments] / Lease term = annual recognition.
Dr Cash - Cash received in period
Cr P/L Lease Rental - Income (Annual Recognition)
Cr Deferred Income - Balancing value
Recognise depreciation
Dr Depreciation
Cr Accumulated Depreciation
