FAR 5 Leases Flashcards
Types of leases
Lessee
Rental:
- operating lease
Sale:
- capital lease
- finance lease
Types of leases
Lessor
Rental:
- operating lease
Sale:
- sales-type or direct financing type
- finance lease
Lessee accounting
Operating lease
a. Lease rent expense
Rent exp
Cash
b. Lease bonus - prepaid amortized using straight line over life of the lease
c. Leasehold improvements - depreciated over the lesser of lease life or asset life
d. Rent kicker - period exp
e. Refundable security deposit - prepaid asset
f. Free or reduced rent consideration - total rent expense divided evenly over each period
- free months
Rent exp 900
Rent payable 900
Rent exp 900
Rent pay 100
Cash 1000
Lessor accounting
Operating lease
a. Fixed asset - depreciation
b. Rental income - straight line
c. Security deposits:
- nonrefundable - unearned revenue
- refundable - liability
d. Lease bonus - unearned revenue
f. Free or reduced rent - total rent divided evenly over lease life
- free months
Rent receivable 900
Rent revenue 900 - payments
Cash 1000
Rent revenue 900
Rent receivable 100
Lessee Capital lease criteria
Meet 1 condition:
- Ownership transfer
- Written option of bargin
- 90% of FV < PV of lease payments
- 75% or more of asset economic life
Asset
Liability
Lessor Capital lease
Sales-type or Direct Financing type
All conditions met:
- Lessee owns the leased property
- Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor
- Collectibility of the lease payments is reasonable predictable
Sales type lease vs. Direct finacing
a. Sales type - FV differs from BV (profit or loss)
b. Direct financing type = FV = BV
Lessee capital lease accounting
- Recording the lease
a. Capitalize amount at the lesser of:
- FV of asset
- PV or the min lease payments
b. Interest payment - the lesser
Depreciation - lessee
- US GAAP
If ownership transfer and written bargin - depreciate over asset life
IF 90% FV and 75% life - depreciate over lease life
- IFRS - the shorter of two unless we know for sure lessee will own - then life
Journal entries Sales - Type lease
Lease payments receivable
Unearned interest income
Sales revenue
COGS
Inventory
Journal entries Direct Financing lease
Lease payments receivable
Unearned interest income
Sales revenue
Sale leaseback
- Major rights retained 90% or more:
Gain - amortize over lease life
Economic loss - recognize immediately
Artificial loss - amortize lease life - Middle rights retained 90% - 10%
Gain - amortize over lease life
Economic loss - recognize immediately
Artificial loss - amortize lease life - Minor rights retained 10% or less:
Gain - recognize immediately
Economic loss - recognize immediately
Artificial loss - recognize immediately
Sale leaseback
- Major rights retained 90% or more
- PV of lease payments is 90% or more of FV of the property - Middle rights retained 90% - 10%
- Minor rights retained 10% or less
