FAR 5-2: Accounting for Leases Flashcards
Identify & define 2 types of leases from the lessee’s perspective under IFRS & GAAP.
*Capital (GAAP)/Finance (IFRS):
Transfers substantially all of the benefits & risks inherent in ownership of property to the lessee. In substance, an installment purchase. Lessee accounts for lease as acquisition of asset & related liability. Lessor accounts for lease as sales-type or direct financing lease (GAAP).
*Operating (IFRS & GAAP):
All other leases.
Identify & define 2 types of leases from the lessor’s perspective under IFRS & GAAP.
*Capital (Finance) Leases:
>Sales-type: Gives rise to manufacturer’s or dealer’s profit or loss. FV differs from cost or carrying value.
>Direct-financing: FV is the same as cost or carrying value at the beginning of lease term.
IFRS does not use the terms “sales type” & “direct financing.”
*Operating:
All other leases.
In an operating lease, give the treatment of a lease bonus, from both the lessor’s & lessee’s perspective.
*Lessor:
Lease bonus is deferred & amortized as income over the life of the lease.
*Lessee:
Lease bonus is capitalized & amortized as an expense over the life of the lease.
Name the criteria for determining if a lease is a capital lease for the lessee under GAAP.
> > > OWNS«<
To be classified as a capital lease under GAAP, the transaction must meet 2 or more of the following criteria:
- Ownership transferred
- Written bargain purchase option
- (Ninety) Present value of minimum lease pymts is equal to or greater than 90% of FMV of asset
- (Seventy-five) Lease term equals or exceeds 75% of estimated useful life
Last 2 items are qualifying criteria as long as asset is not in last 25% of original estimated life.
Name the criteria for determining if a lease is a finance lease for the lessee & lessor under IFRS.
The lessee & lessor classify a lease as a finance lease if the lessor transfers substantially all the risk & rewards of ownership to the lessee.
How does the lessee record the capital lease?
At lower of FV or present value of minimum lease pymts, using the lower of lessee’s incremental borrowing rate or the rate implicit in the lease, if known by the lessee.
NOTE: Minimum lease pymts include pymts, bargain purchase option, & guaranteed residual value. The do not include executory costs or an optional purchase.
Under IFRS, only initial direct costs are recognized as part of the finance lease asset.
Name the criteria for determining if a lease is a capital lease for the lessor under GAAP.
> > > LUC«<
To be classified as a capital lease, the transaction must meet all 3 of the following criteria:
- Lessee “owns” the leased property
- Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor
- Collectibility of the lease pymts is reasonably predictable
What is the difference between sales-type & direct-financing leases (lessor finance leases)?
*Sales-type:
Gives rise to manufacturer’s or dealer’s profit or loss. FV differs from cost or carrying value.
*Direct-financing:
FV is the same as cost or carrying value at the beginning of lease term.
> > > I profit from my sales (-type) lease, NOT from my (direct-) financing lease.«<
What period of benefit is used to depreciate the leased asset by the lessee?
Estimated economic life of asset if lessee takes ownership or there is a bargain purchase option.
Otherwise, lease term.
Identify the 3 classifications used with respect to the seller-lessee’s rights retained in a sale-leaseback under GAAP.
*Substantially all rights retained:
>PV of rent pymts is equal to or greater than 90% of the FV of the property
>Gain deferred & amortized
*Rights retained are less than substantially all but greater than minor:
>PV of rent pymts is less than 90%, but greater than 10% of the FV of the property
>Gain recognized to extent gain exceeds PV of lease pymts
*Minor portion of rights retained:
>PV of rent pymts is 10% or less of the FV of the property
>Entire gain recognized
In all cases, losses (NBV > FV) are recognized immediately.
Outline the accounting by the seller-lessee in a sale-leaseback transaction under IFRS.
If sale-leaseback results in a FINANCE LEASE, defer profit & amortize over the lease term.
If sale-leaseback results in an OPERATING LEASE, profit or loss is recognized based on the relationship between the leased asset’s carrying amount, FV, & selling price.
What are the lessee’s major footnote disclosures for capital leases under GAAP?
- Gross amt of assets capitalized by major property categories.
- Future minimum lease pymts in the aggregate & for each of the next 5 years.
- Amt of imputed interest to reduce net minimum lease pymts to PV.