F4 - M7 - Lessee Accounting Flashcards
Who are the lessor and lessee?
The lessor, is the person that owns the property and they are letting someone else use it for an asset in return (payment).
The lessee, this is the person that is using the asset and paying the lessor.
What are the two criteria that need to be met in order for their to be a lease? Give the first one along with an example.
First: The contract that is signed, the lessor does not have a substantive substitution right.
That means that the lessor cannot replace the item easily, and they more than likely have to repair it. For example, if you lease a coffee machine, and if it doesn’t work you promise to fix it or swap it out. Most of the time you will swap it out if it does not work because it is cheaper.
Now if you are leasing a copier and it costs a lot, if that does not work, then you will probably repair and not swap it out. That means that you do not have substantive substitution right.
It looks like the the key is, if it is expensive then it does not have substitution rights.
What are the two criteria that need to be met in order for their to be a lease? Give the second one along with an example.
The second requirement is that the lease must convey the right to control the use of the asset over the lease term to the lessee.
The lessee must have the right to control the asset over the term. So if you lease a car, you can control that car even if there is a protective right. So lets say that the protective right is that you have to take it in for checkup every six months. Even though that is in the contract the lessee still has control over the use of the asset.
If a lease is entered into, what is the journal entry for the lessee?
Debit Right of Use asset
Credit Lease Liability
This is the journal entry on the commencement date, which is the date that you are entitled to use the asset.
So for example, you you get into a lease on January 1st, but you do not get to use the lease until July 1st, you record this entry on July 1st.
What is an example of a lease vs non-lease component?
If you get into a lease and the lease has multiple components, you have to separate the lease components from the contract.
So if you get into an IT lease for computers, and they promise to service those computers, then you have a lease and a contract.
What are the criteria for knowing if contracts should be combined?
1.) One or more contracts contains or is a lease
2.) Contracts are entered into at approximately the same time.
3.) Parties to the contract are the same, or are related parties.
4.) One or more of the following:
- Performance or price of one contract affects the consideration paid in the other contracts
- Contracts have the same commercial objectives and were negotiated as part of a package.
- Regarding the use of underlying assets, the rights to use them do not meet the accounting criteria for separate lease components.
There is a two step process for accounting for separate lease components. What is step 1?
Step 1: Identify each right to use an underlying asset within the contract
One right to use an asset = One separate lease component.
More than one right to use an asset = Lessee must determine whether each right equates to a separate lease component for accounting purposes.
There is a two step process for accounting for separate lease components. What is step 2?
For a contract that includes both a lease and non lease components, you have two options:
Option 1 - Separate the lease from the non lease
Option 2 - Each separate lease component is combined with non lease components into one unit of account.
What are the two conditions that need to be met in order to separate the lease?
The right benefits the lessee either on a stand-alone basis or together with other resources that are readily available to the lessee.
Rights are neither highly dependent on each other nor highly interrelated.
What is they acronym where you know it is a financing lease?
If any one of these is met, it is a financing lease. If you fail any one of these, then it is an operating lease.
O - Ownership of the underlying asset transfers from the lessor to the lessee by the end of the lease term.
W - Written option that the lessee has to purchase the asset, and one that is reasonably certain to exercise.
N - The net present value of all lease payments and any guaranteed residual value is equal to or substantially exceeds the underlying asset’s fair value.
E - The term of the lease represents the major part of the ECONOMIC life remaining for the underlying asset.
S - The asset is SPECAILIZED such that it will not have an expected, alternative use to the lessor when the lease term ends.
Do you have to capitalize the lease if it is less than 12 months?
No
For the N and E of OWNES, what are the criteria of meeting these standards?
N - 90% or more of the fair value of the underlying asset would be reasonably considered substantial.
E - Major part of the remaining economic life of the asset would reasonably be considered 75 percent or more.
Do lease terms have to account for any options to extend or terminate the lease term?
Yes they will include in the lease in these situations:
You include the extension of the lease if the lessee is reasonably certain to exercise that option.
If the lessee is reasonably certain to terminate the lease than that option is included.
If there is an option to extend the lease and that option is controlled by the lessor, than that is included.
What is included in the lease payments by the lessee?
R - Required contractual fixed payments.
E - Exercise option reasonably assured - The excersie price if the lessee would by the lease. Only applicable if it is reasonability certain.
P - Purchase price at the end of lease - Purchase price at the end of the lease, only if the lessor requires the lessee to purchase the asset.
O - Only indexed or rate variable payments.
R - Residual guarantees likely to be owed - This is like when a dealer says do not drive any more than 60,000 miles on your car at the end of five years. If it is more, they charge you a dollar for every mile. Something like that.
T - Termination penalty, pen for breaking the lease early.
What are some things that may or may not be included in the lease payments?
Could be included or could not:
N - Nonlease componeents - amounts allocated to nonlease components of a contract.
Not included:
G - Guarantees of lessor debt by lessee - This is like if the lessor says if they cannot pay the loan of the lease, you have to pay for me. Not included.
O - Other variable lease payments; think more like contingent expenses. You sign the lease of a strip mall, but you have to pay parking depending on how many customers come. That is separate form the lease, and expensed when incurred.
