Lease

Question 1

What criteria to determine as finance lease for lessee?

Answer 1

A lease is a finance lease if one of the OWNES below is met:
- Ownership: transfer of ownership from lessor to lessee
- Written option: the lessee is “reasonably certain” to exercise the purchase option.
- Net present value (90% or more): all lease payments PLUS PV of guaranteed residual value equals or greater than the FV of the underlying assets.
- Economic life: lease terms represent the major (75% or more) part of the economic life of the assets.
- Specialized: the assets are for specific use only and the lessor won’t have an expected/alternative use.

Question 2

What criteria is determined as operating lease for lessee?

Answer 2

A lease is an operating lease if none of the OWNES criteria is met, or the lease is less than 12 months (short term)

Question 3

How does lessor account for a lease based on OWNES PC criteria?

Answer 3

• Sale-type lease: at least of the OWNES criteria is met.
• Direct financing lease: none of the OWNES criteria is met, but both of the P (present value of all lease payments + PV of residual value) C (collection of lease payments) criteria are met.
• Operating lease: none of the OWNES criteria is met, and either one or no PC criteria is met.

Question 4

what happens to lease payment and interest if there is an increase in an operating lease for a lessee?

Answer 4

A lessee should record an operating lease using straight line method, so there is no change on lease payment nor interest expense if there are changes.

Question 5

what happens to lease payment and interest if there is an increase in an operating lease for a lessee?

Answer 5

A lessee should record an operating lease using straight line method, so there is no change on lease payment nor interest expense if there are changes.

Question 6

what is “failed sale”

Answer 6

If A sale an asset to B, and then lease it back as a finance lease, then it is considered as a repurchased or “failed sale”