LEASES

Question 1

Lease

Answer 1

contractual agreement between a lessor and a lessee –> that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time

Question 2

lessee vs lessor

Answer 2

lessor = the one that provides the good
lessee = the one that has the right to use that asset
pays a periodical amount to the lessor

Question 3

sign a leasing contract

Answer 3

no transfer of ownership
definite time period
growth of leasing contract

Question 4

Largest group of leased equipment:

Answer 4

Information technology equipment
Transportation (trucks, aircraft, rail, boats)
Construction
Agriculture

Question 5

Advantages of Leasing for LESSEES

Answer 5

100% financing at fixed rates
Protection against obsolescence
Flexibility
Less costly financing

Question 6

Advantages of Leasing for LESSORS

Answer 6

often provides profitable interest margins
can stimulate sales of a lessor’s product
often provides tax benefits to various parties in the lease
can provide a high residual value to the lessor

Question 7

Leases made for 2 main reasons:

Answer 7

1. financing → 100% control/ownership of the asset transferred to the lessee
2. operational → lessee is ready to give back the good

Question 8

accounting treatment for lessees

Answer 8

Statement of Financial Position
- Non-current liability → Lease liability
- Current liability → Periodic lease payment

Income statement
- Interest expense (financing cost)
- Depreciation expense

Question 9

Lease Accounting according to IASB

Answer 9

IASB requires lessees to capitalize all leases → lessee has to recognize them as assets (right of use asset) and corresponding liability for lease payment

Question 10

only exceptions for leasing accounting

Answer 10

1. Low-Value Leases
   - leases covering a term of less than 1y
   - underlying assets with values of $5,000 or less
   - lessee may elect to expense lease payments as incurred
2. Short-Term Leases
   - lease of property with a value less than $5,000
   - lease term of 12 months or less
   - lessee may elect to expense lease payments as incurred

Question 11

Right to use property under the lease is:

Answer 11

an asset
lessee’s obligation to make payments is a liability

Question 12

Lessee

Answer 12

• recognizes interest expense on the lease liability using the effective-interest method
• records depreciation expense on the right-of-use asset

Question 13

Finance lease is applied whether the lease is effectively:

Answer 13

• a purchase of the asset or
• when the lessee only controls the use of the asset

Question 14

Lease term

Answer 14

fixed non-cancelable term of the lease

Question 15

to change lease term

Answer 15

bargain-renewal option
at commencement of the lease: difference between renewal rental and expected fair rental must be great enough to make exercise of the option to renew reasonably certain

Question 16

Lease payments

Answer 16

-fixed payments
-variable payments that are based on index/rate
-guaranteed residual value
-payments related to purchase or termination options that the lessee is reasonably certain to exercise

Question 17

Discount rate

Answer 17

• Lessee should compute the PV of lease payments using implicit interest rate
• discount rate at commencement of the lease:

1. causes the aggregate PV of lease payments and unguaranteed residual value to be = fair value of the leased asset
2. if it’s impracticable to determine implicit rate → lessee uses its incremental borrowing rate

Question 18

Bargain purchase option

Answer 18

allows the lessee to purchase the leased property for a future price that is substantially < than the asset’s expected future fair value

• Lessee must increase the PV of lease payments by the PV of option price
• affects accounting in the same way as a guaranteed residual value with a probable amount to be owed