Lease Flashcards
If there are incremental borrowing rate for lessee and implicit rate of lessor, which rate to use for calculating interest expense?
What about if there are two MLP for lessee and lessor, which one to use for lessee to record as MLP?
Interest expense use the lesser of the two rates, implicit rate if known by lessee
MLP: use the incremental borrowing rate lessee’s used to calculate the MLP
Study lease JE
Remember how to do lease JE
JE for direct financing lease for lessor
Lessor:
Initial recognition
Dr. Lease receivable (MLP+ unguaranteed RV)
CR. Unearned interest revenue
CR. Asset
Recognize interest revenue
Dr Cash and unearned interest revenue
CR. Lease receivable =lease payment
CR. Interest revenue = beg MLP* lessors implicit rate
Interest revenue and unearned interest revenue JE are symmetry
JE for financing lease for lessee
At initial recognition
Dr Leased assets MLP
CR leased liability
Recognize interest expense
Dr Interest expense beg MLP* interest rate
Dr Leased liability
CR cash = lease payment amount
Need to recognize depreciation expense
For sales type lease JE for lessor
At initial recognition
Dr. Lease receivable (sum of lease payment and unguaranteed RV)
Dr unearned interest revenue (total interest over the term)
CR sales at FV = selling price
CR COGS and asset derecognition. = cost of asset
Example
Lease receivable 27777
Unearned interest revenue. 2006
Sales. 25771
COGS. 20000
Assets. 20000
Lessor recognize gross profit immediately
IFRS and GAAP difference
- Different in terms
- Classification of lease
- Conditions for finance lease
- Rate to be used?
- Finance lease is referred as mftg or dealer finance asset
- Criteria is not using the 75% and 90% to determine, more judgement based and depends on if substantial risk and reward of ownership is transferred to lessee
- TT and BPO
+ judgment based
+ additional consideration - IFRS only use lessor’s implicit rate in all cases, unless the lessee is not able to determine he rate
Capital Leased assets
Term 8 years
FV 200,000. No RV
BVof asset is 140k immediate at signed lease
10% interest
Signed lease on 1/1/03, first payment due PV of annuity due is 1/1/03
Annuity due factor= 5.86842
JE for lessee and lessor
Lessee: 1/1/03 Dr. Leased asset 200k Leased liability. 165,919 Cash. 34081
200000/5.86842 = 34,081
12/31/03
Interest expense 165919 * 10%
Interest spay able. 16592
Lessor
1/1/03
Dr. Lease receivable 238567 =340818 -34081
Dr. Cash. 34081
Dr. COGS. 140k
Unearned interest 72648 = 340818-200000
Equipments. 140k
Sales. 200k
Unrated interest revenue 16592
Interest revenue. 16592.
If not due and the cv of lease is 200k, then the JE for lessor would be:
Lease receivable 299910
Unearned LR. 99910
Equivalents. 200000
Record Interest
Dr Cash. 37489
Dr. Unearned interest 20000
CR. Lease receivable 37489
CR. Interest receivable 20000
How should lessee and lessor treat the unguaranteed RV in the lease?
What about executors cost?
Lessee: exclude PV in MLP, but guaranteed by third party, the don’t.
Lessor: always included at PV for either guaranteed LR unguaranteed
Executors cost is subtracted before calculating the PV of MLP
GAAP for Leased building with land
When lease land only, criterion 3 and 4 don’t apply
If criterion 1 or 2 met, then lessee record as two separate lease, but lessor combine both together
If neither are met, and FV of land is 25% of the combined value, land is operating lease, building is either operating or capital lease, check the criteria.
IFRS and GAAP difference on initial direct cost
IFRS
Expense related to negotiating and completing the lease agreement is included ( legal fees, cost is credit investigation, employee compensation related to lease and clerical cost)
These costs exclude solicitation and advertising
Lessee accounting is not affected by those costs
For lessor, depends on what type of lease
Operating lease:capitalize and amortize over the lease term
Sales type lease: as selling expense
Direct financing lease: include in lessor’s gross receivable, cash and other assets are decreased, total lease interest is decreased as well.
What is the treatment for leased assets for 5 yrs that has 8 yrs if useful life, and has estimated RV and BPO. What is the deprecation expense?
(Mv of assets - RV )/ 8 yrs
- How to calculate sales leaseback gains?
- Sales lease back gain and losses situations
- How is sale lease back works?
- Gain = selling price - CV of assets
- Gain - major lease back
Gain - minor lease back
Gain - between major and minor
Losses - real and artificial
- How:
A sales assets to B
A then lease it back fell B
A become the seller lessee; B becomes buyer lessor
Major gain accounting treatment
Lessor pays seller lessee selling price > FV, difference will return to lessor in the form of higher rental , if the price
Accounting for operating lease gain
Gain Record in liability account, and amortize over the lease term to defer the gain
What % is sales leaseback for minor gain
When MLP is
If the gain is in between, what is the accounting?
Defer gain and recognize over the lease term
Ie sales lease 900k
Cv 300k
MLP = 450k
Implied Gain = 900-300 =600
Normal gain compare sales and MLP = 450
The 600-450= 150 recognized immediately, and the rest (450) will be amortized over its lease term.
Calculation of Losses and its accounting treatment
Loss can be artificial or real
Artificial is the sales price is purposely lower than FV, so it can recognize loss
When FV = SP,
Real is when FV BV, any loss recorded is deferred and amortized
When loss is amortized, the capital expense is increased
Distinguish liabilities related to equity
- For shares issued at fixed value of service cost
2.
- Mandatorily redeemable shares classify as liability if
1) firm have to repurchase its own equity 2) may need to transferring assets to settle the payment. - Financial instrument is exchanged by issue shares worth a fixed value (non cash transaction)
- Certain stock appreciation rights by issue share for service
Record at agreement
JE: dr service expense at Fixed price
CR. Liability for stock issuance
At settlement for fixed value
Dr. Liability for stock issuance
CR. CS
CR. PIC (FV -par)
Liability at fixed shares
Dr. Service expense
CR. Stock issuance obligation
At settlement
Dr. Stock issuance obligation
CR. CS
CR. PIC
- Put options or other financial instruments to purchase its own shards (but TS)
See next page
Put option
What is put option?
JE for put option
Firm write stock for other company to sell it back at a fixed price (option price) on a specific date or during a specific period
The purchaser pays a fee for the option is about the FV of the option
Purchaser want the purchase price to stay lower than selling price
Firm want the stock price to be as high the repurchase price
The FV of the option is recorded as a liability recognized at each year end before exercise the option.
JE
At writing the option
Dr Cash at shares * option price
Put option liabilty. Same value
Year end after reevaluate the option value increased
Dr. Loss on put option. (New price -old option price )
CR. Put option liability. Same
After Option is exercised (when firm price is less than repurchase price)
Dr put option liability. =what have been recorded
Dr. TS. Shares * FV is stock
Cash. At promised repurchase price
Gain on put option (the rest)
If the option is not exercised: reverse the put option like ability and record a gain on the option
How to treat convertible bond?
As debt just like non-convertible bond
Only at convention, derecognize of debt and recognize equity amount
Bond with stock warrant will be treated separately **
Distinguishing liability difference is GAAP and IFRS
IFRS : financial instrument is recognized differently
It depends on if the obligation involve transfer of asset, if yes, it is a liability
Convertible bond might be separately recorded as the equity and debt portion, if the distinguish is made at issuance and continue until it derecognized
If giving annual lease payment for lesser and the lease term, how to calculate lessor’s lease receivable and interest unearned revenue?
What about for sales lease?
Annual receivable * lease term + I discounted value of BPO or RV
Interest revenue is lease receivable - lessee’s lease liability
If sales type lease:
MLP * factor for lessee
Lessor:
Annual lease receivable * lease term
Equipment is always the cv of the asset
Lease interest revenue is sales lease receivable - MLR - PV of BPO or RV
COGS: lease receivable - interest revenue - equipment - sales (same as lessee recorded liability)
