F5- Leases Flashcards
How is a Capital Lease recorded?
- Capitalize at cost:
- Asset & Liability Recorded at Present Value of Future Lease Payments
What footnote disclosures are required for a Capital Lease?
Future minimum rental commitments
By year - for 5 years
All remaining years as a group
What are the requirements for a Capital Lease for a lessor? [US GAAP]
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
What are the characteristics of an Operating Lease for a lessee?
Risk of ownership does NOT pass
No asset or liability is recorded on the financial statements
What are the characteristics of an Operating Lease for a LESSOR?
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
What are the characteristics of a Direct Financing Lease?
Interest Revenue (or expense for lessor) decreases with passage of time
Principal amount increases with each payment
Carrying amount of Lease decreases
How is a sale-leaseback recorded?
Any profit on the sale is deferred and amortized
What are the characteristics of lease payments under an annuity due situation?
Payments begin at the start of the lease period
Think: Rent/Mortgage payments are Due at the first of the month
What are the characteristics of lease payments under an ordinary annuity situation?
Payments begin after the end of the first year
Think: An annuity that pays you at the end of each year
What are the characteristics of a Capital Lease for a lessee ?
[US GAAP]
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.
Operating Lease Depr. Terms
- Lesser of: Useful Life or Lease Term
Rent Kicker
- Premium rent payment required for specific events/Thresold
- Period Expense
Lessee Finance Lease 4 Criteria
[IFRS]
- 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.
Recording the Lease Capitalized Amount INCLUDES?
- Required Payments
- Bargain Purchase Option
- Guaranteed Residual Value
Recording the Lease for Interest Rate the lesse uses the Lower of the:
- Rate implicit in the lease
- Lesse’s incremental borrowing rate
- (Not Prime)
- Lessee KEEPS asset at the end of lease, the Lessee depreciates the asset over
- The Asset’s Useful life
Net investment Calc. of Lease Payments
Lease Payment
+ Guaranteed residual value
= Gross Investment
X PV = Net Investment
Unearned Interest Revenue Equals?
[Contra-Lease Receivable]
Gross Investment
COGS of Leased Asset includes?
- Cost of the leased asset plus any initial direct costs
- Such as legal fees or commissions to the lessor
- Cost of Asset =COGS
Sales Revenue
- PV of the minimum lease payments is recorded as sales revenue
- Any Guaranteed residual value
- Cost+ Profit=Selling price=FV=PV
What do you do with the Deferred Gain of Capital Leaseback?
-Any Deferred Gain or Loss is amortized
In Finance Lease any profit from the Sale-Lease back transaction is?
[IFRS}
- Deferred and Amortized over the Lease term.
Operating Lease Valuation
- FV and Selling Price
If the Original Lease was an Operating Lease, the Sublease is?
- Also an Operating Lease
Carrying Value Calc.
FACE + Un-amortized Premium= Carrying Amount
OR
FACE- Un-amortized discount= Carrying Value
Operating Lease Improvements should be depr. over the lesser of:
- Lease Life Asset
OR - Improvement Life
Recording the Lease Capitalized Amount EXCLUDES?
- Executory costs :
~ Insurance, Maintenance, Taxes can be paid by the lessor.
~ Optional Buyout (not required & not a bargain)
Lessor gets asset at the end of lease, Lessee depreciates the assets
- Over Lease term.
Amortization of Gross Rental Exp of Operating Leaseback over?
- Over Life of the Lease
In a Operating Lease Profit or Loss from the Sale-leaseback transaction is recognized based on the Leased asset’s?
- Carrying amount
- FV &
- Selling Price.
If the Original Lease was a Capital Lease due to: ‘Ownership transfer’ & ‘Written Bargain Purchase’ then the Sublease is also?
- A Capital Lease
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?
- Operating Lease
Sale-leaseback Recording Exception: If PV of lease payments is 10% or LESS of the asset’s FMV
-The Gain is Recognized
Sale-leaseback Recording Exception: If PV of lease payments is GREATER than 10% of FMV and the lease is operating the Gain?
- All of the gain is recognized:
- Except the amount of the PV of the lease payments
Lessee’s Fin. Statement Disclose of leases: 3 Criteria
- 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.
