Chapter 5 Section 2: Accounting for Leases Flashcards
Who are the two parties in a lease agreement?
Lessor: leases their property
Lessee: uses the leased property
What are the types of leases, and what do the different parties in the agreement call them?
Lessee: operating and capital
Lessor: operating and sales-type and direct financing
Note: IFRS has operating and financing and both parties call it that.
What is a lease bonus and how is it accounted for?
It’s a prepayment of future expenses and is classified as an asset and amortized straight line over the life of the lease.
Define leasehold improvement
One that is permanently affixed to the property and reverts back to the lessor at the termination of the lease. They should be capitalized and added to PP&E
How do you depreciate leasehold improvements under an operating lease?
LESSER of lease life or asset/improvement life
What do you do with free or reduced rent consideration?
Take the new total of all the rent payments you’ll make and divide by the number of payments. Use that number in the JE for an equal expense each time.
How are nonrefundable and refundable security deposits handled?
Nonrefundable: lessor defers as unearned rev, lessee capitalizes until earned by lessor
Refundable: lia for lessor and receivable for lessee
How do operating and capital leases differ?
Operating is just like renting
Capital is like a sale
What are the lessee capital lease criteria?
OWNS
Ownership transfers
Written option for bargain purchase
Ninety (90%) of leased property FV is less than or equal to PV of lease payments
Seventy-five (75%) of asset life is committed in lease term
How does IFRS differ from GAAP regarding OWNS?
They’re less strict. Have the majority of the last two.
What are the lessor capital lease criteria?
LUC
Lessee owns the leased property
Uncertainties don’t exist regarding costs incurred by the lessor
Collectibility of payments is predictable
What’s the different between sales-type and direct financing?
Sales type = 2 profits: gain on sale and interest income
Direct financing = 1 profit: interest income
It’s direct financing if FV = cost. There is therefore no COGS
Under a capital lease, what does the lessee record the least at?
LESSER of FV of asset at inception of lease or cost (PV of minimum lease payments - exclude executory costs)
Under a capital lease, what interest rate does the lessee use?
LESSER of the rate implicit in the lease or the lessee’s incremental borrowing rate
For disclosures, how many years do they like?
Five
In lessor accounting for a sales-type lease, what does gross investment mean?
Lease payment + unguaranteed residual value
What is net investment?
Gross investment x PV
What is unearned interest revenue (to be received in the future)?
Gross investment - net investment
How do you calculate COGS?
Cost of asset - PV of unguaranteed residual value
How do you calculate operating lease excess profit in a sale-leaseback?
Sale price -Asset NBV =Tentative gain -PV of min lease pmts =excess gain
How do you calculate capital lease excess profit in a sale-leaseback?
Sale price -Asset NBV =Tentative gain -leaseback asset =excess gain
What are the ways a seller/lessee can record gains in a sale-leaseback?
Retain >90% of rights
Means PV of pmts > 90% of FV of property
Defer all gain and amortize with asset
Retain 10-90% of rights
Defer gain up to PV of min leaseback pmts or capitalized asset. Gain above this is recognized now
Retain
How are losses accounted for by the seller/lessee in a sale-leaseback?
If they’re real, recognize now.
Artificial (SP
How does IFRS account for gains and losses by the seller/lessee?
Finance: defer and amortize
Operating: recognize
How does the lessor’s accounting change if the lessee subleases?
It doesn’t.
How does the lessee classify the sublease?
If original was operating, it’s operating.
If original was capital because O or W, it’s capital.
If original was capital because N or S, it’s operating
