F4 M7 Flashcards
Leases
what two things need to be present for a contract to be a lease?
1) depend on identifiable asset in which lessor does not have substantive substitution right
2) explain to lessee right of control of asset and obtain all of benefits from using asset and control use
when contracts should be combined?
1) one or more contracts contain a lease
2) contracts entered into about the same time
3) parties of contract are the same
4) performance or price of one contract impacts other contracts
5) contracts have same commercial objectives
6) use of lease does not qualify as single component
accounting for separate lease components?
1) identify each right to use an asset within contract
2) if contract contains a lease and non-lease components then:
Option 1: lease components are separate units of account from nonlease components
Option 2: each separate lease component combined with related nonlease components into one unit of account
what if there is one right to use an asset?
one separate lease components
what if there is more than one right to use an asset?
separate if:
1) right benefits lessee on stand-alone basis or together with other resources available to lessee
2) rights are neither highly dependent on each other nor highly interrelated
consideration associated with a contract that must be allocated calc
all components of lease payments
+ other required payments in contract
-incentives owed/provided to lessee not accounted for in lease payments
what if Option 1 is chosen?
consideration of contract allocated to separate lease and nonlease components based on relative stand-alone prices
what if Option 2 is chosen?
consideration will be allocated to each combined unit of account based on relative stand-alone prices
finance lease criteria (OWNES)
1) ownership
2) written option
3) net present value of all lease payments and any guaranteed residual value = asset’s fair value (90% or more)
4) economic life; term of lease represents major part of economic life of asset (75% or more)
5) specialized asset with no alternative use
operating lease criteria
1) none of OWNES criteria for finance lease met
2) lease is less than 12 months
when does the lease term begin?
on the commencement date of the lease
when does the option to terminate or extend a lease exist?
1) either party has right to terminate
2) periods covered by an option to extend lease are included if lessee certain to exercise option
3) option to terminate included if lessee certain not to exercise option
4) periods covered by an option to either extend or not to terminate the lease included if exercise is controlled by lessor
what items are included in lease payment calculation?
1) required contractual fixed payments
2) exercise option reasonably assured
3) purchase price at end of lease
4) only indexed or rate variable payments
5) residual guarantees likely to be owed
6) termination penalties reasonably assured
what rate is used for a lease?
1) rate implicit in the lease OR if not determinable
2) incremental borrowing rate of lessee
what are initial direct costs and how are they treated in relation to a lease?
-included in valuation of ROU asset
-costs incurred as a result of execution of lease
-any costs incurred prior to signing lease like lease term negotiations, document preparation, credit checks etc. not included in accounting for direct costs
how are operating leases recorded on financials?
-ROU asset and liability recorded on B/S and amortized over life of lease using effective interest method
-lease expense recognized on I/S using SL method
-interest will be included as part of lease expense
the purchase option and guaranteed residual are valued at?
PV of $1
journal entries for ROU asset and liability
Dr. ROU asset
Cr. Lease liability
subsequent journal entries for lease expense and amortization
Dr. Lease expense
Cr. Cash/lease liability
Dr. Lease liability
Cr. Accumulated amortization-ROU asset
journal entry to record lease payment
Dr. Lease expense
Dr. Lease liability
Cr. Cash
Cr. Accumulated amortization-ROU asset
how are leases recorded for financing leases on financials?
-ROU asset and liability recognized on B/S
-liability = PV of lease payments owed
-ROU asset includes initial direct costs (ex. commission paid, legal and consulting)
-incentives received by lessee from lessor will reduce value of asset
-journal entries are exactly the same as an operating lease liability
-ROU asset amortization will be expensed similar to recognizing amortization expense on other assets
how is amortization expense calculated for a finance lease?
PV of all lease payments / number of years of lease term
how is amortization expense calculated for an operating lease? AKA ROU asset reduction
lease expense - interest expense (calculated using effective interest method)
how is the total lease expense calculated for a financing lease?
amortization expense + interest expense
journal entry for lease payment under financing lease?
Dr. interest expense
Dr. lease liability
Cr. Cash
journal entry for amortization under financing lease?
Dr. amortization expense
Cr. accumulated amortization-ROU asset
accounting policy of ROUs election
lessees can choose not to recognize an ROU asset and lease liabilities for leases with terms of 12 months or less
-if election made, must be done by class of underlying asset and not include purchase options for asset lessee will certainly exercise
B/S presentation of leases
-ROU assets and liabilities recognized as separate line items or with other assets and liabilities and disclosed separately in notes to F/S
-portion of lease liabilities due in one year or operating cycle, reported in current section and remaining in long-term
-finance and operating lease ROU assets/liabilities cannot be presented together
-ROU asset amortized and lease liability paid down over life of lease
ROU asset amortization rules
ROU asset amortized beginning of commencement date using SL method
-amortize over asset’s useful life if ownership or written option criteria met
-amortize over shorter of lease term or useful life of asset if NPV, economic life, or specialized asset criteria met
operating and finance leases on I/S
operating leases: lease expense included in income from continuing operations on lessee’s I/S
finance leases: I/S includes amortization of ROU asset and portion of lease expense related to interest on lease liability
operating and finance leases on cash flow statement
operating leases: lease payments (including variable and short-term) under operating activities. Payments to bring asset to condition or prep is investing activities
financing leases: principal portion of lease payment is financing activity, interest portion is operating, and any variable or ST lease payments not included is operating
qualitative lessee disclosures
1) nature of leases
2) determination of variable lease payments
3) residual value guarantees
4) info on significant obligations and rights of lessee
5) significant assessments and judgments
6) sale lease-back terms and conditions
7) accounting policy for ST leases and combining lease and non-lease components
quantitative lease disclosures
1) finance lease costs
2) operating lease costs
3) ST lease costs
4) variable lease costs
5) cash payments for lease liabilities separated between operating and financing cash flows
6) supplemental noncash info on lease liabilities due to obtaining ROU assets
7) weighted average remaining lease term and discount rate
8) separate maturity analyses for operating and finance lease liabilities for five yrs
