F5- Leases

Question 1

How is a Capital Lease recorded?

Answer 1

• Capitalize at cost:

- Asset & Liability Recorded at Present Value of Future Lease Payments

Question 2

What footnote disclosures are required for a Capital Lease?

Answer 2

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

Question 3

What are the requirements for a Capital Lease for a lessor? [US GAAP]

Answer 3

Same as for lessee (Title- BPO or Substance)-

-Lessee’s “owns” leased property

PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

Question 4

What are the characteristics of an Operating Lease for a lessee?

Answer 4

Risk of ownership does NOT pass

No asset or liability is recorded on the financial statements

Question 5

What are the characteristics of an Operating Lease for a LESSOR?

Answer 5

Rent revenue recorded

Leased property remains an asset and depreciated by lessor

If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

Question 6

What are the characteristics of a Direct Financing Lease?

Answer 6

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

Question 7

How is a sale-leaseback recorded?

Answer 7

Any profit on the sale is deferred and amortized

Question 8

What are the characteristics of lease payments under an annuity due situation?

Answer 8

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

Question 9

What are the characteristics of lease payments under an ordinary annuity situation?

Answer 9

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

Question 10

What are the characteristics of a Capital Lease for a lessee ?
[US GAAP]

Answer 10

Risk of ownership passes to lessee by:

O- Title

W- Bargain Purchase Option (BPO)

N- PV of minimum lease payments are more than 90% of fair value

S- Substance - Lease is more than 75% of asset’s useful life

• ‘N’ & ‘S’ can’t be used for a lease that begins within the last 25% of the original estimated Econ. life of the leased property.

Question 11

Operating Lease Depr. Terms

Answer 11

• Lesser of: Useful Life or Lease Term

Question 12

Rent Kicker

Answer 12

• Premium rent payment required for specific events/Thresold

- Period Expense

Question 13

Lessee Finance Lease 4 Criteria

[IFRS]

Answer 13

• The lease transfers ownership of the asset to the lessee by the end of the lease term.
• The lease contains a written bargain purchase option
• Lease term is for the major part of the economic life of the asset even if title is not transferred.
• PV of the minimum lease payments amounts to at least substantially all of of the FV of the leased asset.

Question 14

Recording the Lease Capitalized Amount INCLUDES?

Answer 14

• Required Payments
• Bargain Purchase Option
• Guaranteed Residual Value

Question 15

Recording the Lease for Interest Rate the lesse uses the Lower of the:

Answer 15

• Rate implicit in the lease
• Lesse’s incremental borrowing rate
• (Not Prime)

Question 16

• Lessee KEEPS asset at the end of lease, the Lessee depreciates the asset over

Answer 16

• The Asset’s Useful life

Question 17

Net investment Calc. of Lease Payments

Answer 17

Lease Payment
+ Guaranteed residual value
= Gross Investment

X PV = Net Investment

Question 18

Unearned Interest Revenue Equals?

[Contra-Lease Receivable]

Answer 18

Gross Investment

Question 19

COGS of Leased Asset includes?

Answer 19

• Cost of the leased asset plus any initial direct costs
• Such as legal fees or commissions to the lessor
• Cost of Asset =COGS

Question 20

Sales Revenue

Answer 20

• PV of the minimum lease payments is recorded as sales revenue
• Any Guaranteed residual value
• Cost+ Profit=Selling price=FV=PV

Question 21

What do you do with the Deferred Gain of Capital Leaseback?

Answer 21

-Any Deferred Gain or Loss is amortized

Question 22

In Finance Lease any profit from the Sale-Lease back transaction is?
[IFRS}

Answer 22

• Deferred and Amortized over the Lease term.

Question 23

Operating Lease Valuation

Answer 23

• FV and Selling Price

Question 24

If the Original Lease was an Operating Lease, the Sublease is?

Answer 24

• Also an Operating Lease

Question 25

Carrying Value Calc.

Answer 25

FACE + Un-amortized Premium= Carrying Amount

OR

FACE- Un-amortized discount= Carrying Value

Question 26

Operating Lease Improvements should be depr. over the lesser of:

Answer 26

• Lease Life Asset
  OR
• Improvement Life

Question 27

Recording the Lease Capitalized Amount EXCLUDES?

Answer 27

• Executory costs :
  ~ Insurance, Maintenance, Taxes can be paid by the lessor.

~ Optional Buyout (not required & not a bargain)

Question 28

Lessor gets asset at the end of lease, Lessee depreciates the assets

Answer 28

• Over Lease term.

Question 29

Amortization of Gross Rental Exp of Operating Leaseback over?

Answer 29

• Over Life of the Lease

Question 30

In a Operating Lease Profit or Loss from the Sale-leaseback transaction is recognized based on the Leased asset’s?

Answer 30

• Carrying amount
• FV &
• Selling Price.

Question 31

If the Original Lease was a Capital Lease due to: ‘Ownership transfer’ & ‘Written Bargain Purchase’ then the Sublease is also?

Answer 31

• A Capital Lease

Question 32

If the Original lease was a Capital Lease b/c it met either of ‘90% FV’ or ‘75% of Life’, then the Sublease will be?

Answer 32

• Operating Lease

Question 33

Sale-leaseback Recording Exception: If PV of lease payments is 10% or LESS of the asset’s FMV

Answer 33

-The Gain is Recognized

Question 34

Sale-leaseback Recording Exception: If PV of lease payments is GREATER than 10% of FMV and the lease is operating the Gain?

Answer 34

• All of the gain is recognized:

- Except the amount of the PV of the lease payments

Question 35

Lessee’s Fin. Statement Disclose of leases: 3 Criteria

Answer 35

• Future minimum lease payments in the aggregate
  &
• For each of the next 5 yrs, showing deductions for executor costs, including any profit thereon,
  &
• Amount of imputed interest to reduce the net minimum lease payments to present value.