Leases Flashcards
How is a Capital Lease recorded?
Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments
What footnote disclosures are required for a Capital Lease?
Future minimum rental commitments
By year - for 5 years
All remaining years as a group
What are the requirements for a Capital Lease for a lessor?
Same as for lessee (Title- BPO or Substance)- PLUS:
Collectability of lease payments is predictable
No uncertainties about the lessor reimbursing the lessee for costs incurred
What are the characteristics of an Operating Lease for a lessee?
Risk of ownership does NOT pass
No asset or liability is recorded on the financial statements
Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.
What are the characteristics of an Operating Lease for a LESSOR?
Rent revenue recorded
Leased property remains an asset and depreciated by lessor
If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis
What are the characteristics of a Direct Financing Lease?
Interest Revenue (or expense for lessor) decreases with passage of time
Principal amount increases with each payment
Carrying amount of Lease decreases
How is a sale-leaseback recorded?
Any profit on the sale is deferred and amortized
Exception: If PV of lease payments is 10% or less of the asset’s FMV- the gain is recognized
If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments
What are the characteristics of lease payments under an annuity due situation?
Payments begin at the start of the lease period
Think: Rent/Mortgage payments are Due at the first of the month
What are the characteristics of lease payments under an ordinary annuity situation?
Payments begin after the end of the first year
Think: An annuity that pays you at the end of each year
What are the characteristics of a Capital Lease for a lessee?
Risk of ownership passes to lessee by:
Title,
Bargain Purchase Option (BPO),
Substance - Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of fair value
Accounting for direct lease costs incurred by the lessor in operating lease
commissions and legal fees
capitalized by the lessor
amortized STRAIGHT LINE over term of lease
Executory costs incurred by the lessor in an operating lease
TIM
taxes, insurance, maintenance
expensed as incurred
Capital lease - lessee
TT, BPO,
75 lease term at inception
PV of MLP is = or > 90 of FMV of the property at inception
if the beginning of lease term falls within the last 25% of the asset life, criteria 3 & 4 don’t apply.
in this case, classify as capital lease only under TT and BPO
Initial indirect costs in a sales type lease is accounted for as -
expensed as incurred
