FAR 5 - Accounting for Leases - Capital (Finance) Lease - Lessee Flashcards
What are the criteria for capital lease for Lessee (buyer) under U.S. GAAP?
MUST MEET ONLY ONE CONDITION
1) Ownership transfers at end of lease
2) Written option for bargain purchase
3) 90% of leased property is less than PV of lease payments (PV of lease payments / Fair Value) must be greater than 90%
7) 75% or more of asset economic life is being committed to lease term
How do you record capital lease in books for Lessee?
Dr: Fixed asset
Cr: Liability
What are the criteria for capital lease for Lessee (buyer) under IFRS?
1) The lease transfers OWNERSHIP
2) The lease contains a written bargain
3) The lease term is major part of the economic life
4) The present value of minimum lease payments amounts to at lease substantially all of the fair value of asset
5) The lessee bears the fluctuation in the fair value of residual value
6) The lessee has ability to lease for a secondary period at a rent substantially lower than market.
7) The lessee can cancel the lease, and the lessor’s losses are beared by the lessee
8) The leased assets are of a specialized nature, that only the lessee can use them.
What are the criteria for capital lease for Leessor (seller) under U.S. GAAP?
Capital lease for a seller is called Sales-Type/Direct Financing Type
1) Lessee “owns” the leased property (all four criteria by lessee are met)
2) Uncertainties doe not exist about unreimbursable costs to be incurred by the lessor.
3) Collectability of the lease payments is reasonably predictable.
What is the difference between Sales-Type Lease and Direct Financing Lease?
Sales-Type Lease
1) Gain on Sale profit
2) Interest Income profit
Direct Financing Lease
1) Interest Income profit
How much does lessee capitalize the capital lease as an asset and liability?
The LESSER of:
1) Fair value of the asset
2) PV of min lease payments (cost)
What is included in cost to lessee in capital lease?
1) Bargain Purchase Option
2) Guaranteed Residual Value - the amount guaranteed by the lessee to the lessor for the estimated residual value of the asset at end of term.
What is excluded in cost to lessee in capital lease?
1) Executory costs - insurance, maintenance, taxes
2) Optional buyout
How are periodic payments recorded and how are bargain purchase option or guaranteed residual payments recorded?
1) Periodic payments are recording at either PV of annuity due (beg of period) or PV of ordinary annuity (end of period)
2) Bargain purchase option and guaranteed residual is record at PV of $1.
What interest rate do you use for present value of the minimum lease payments?
The LESSER of
1) Rate implicit in the lease (if known)
2) Lessee’s incremental borrowing rate
What is depreciation method calculation?
Capitalized lease assets - salvage value = Depreciable basis - periods of benefit.
What is the period of benefit under capitalized leased asset for U.S. GAAP?
1) If ownership transfer and written bargain than use estimated economic life of the asset
2) If ninety % and seventy-five % life than use the lease term.
What is the period of benefit under capitalized leased asset for IFRS?
The depreciation period is the SHORTER of the lease term and he useful life of asset.
What disclosures to make for Lessee’s Financial Statements?
Capital Lease: Current amortization charges to income should must be disclosed, and future minimum lease payments in the aggregate and for each of the next five years.
Operating Lease: Minimum future rental payments in total, for each of the next five years.
