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 is ordinary
What are the characteristics of a Capital Lease for a lessee?
Risk of ownership passes to lessee by “OWNS”:
Ownership transfer (title)
Written Bargain Purchase Option (BPO)
Ninety % of FV (PV of minimum lease payments)
Seventy-five % of Life (lease)
What is the depreciable life of an asset under Capital Lease?
Either asset/lease life depending on the determinative factor of how deemed a Capital Lease (OWNS):
O & W = Asset’s useful life
N & S = Lease term
If IFRS - depreciable life is the LESSER of:
Asset’s useful life
or
Lease term
Trick:
keep asset at end of lease - use asset life
give back asset at end of lease - use lease term
How is the excess profit on a Sale-Leaseback accounted for?
Operating Lease Excess Profit (rent back):
Sale price - asset NBV - PV min lease payment
Capital Lease Excess Profit (“OWNS” back):
Sale price - asset NBV - leaseback asset
both of above are:
gain on sale - given back = keep
How are the Deferred Gains on Sale-Leasebacks accounted for?
If PV of rent payments is:
> 90% “Substantially all” rights retained: defer all gain and amortize over the leased asset
90%-10% Rights Retained < “Substantially all” but > “Minor”: defer gain up to give back (PV of min leaseback payments in operating lease OR capitalized asset in capital lease), gain in excess of this amount is recognized immediately
< FV)
