Leases Flashcards
What components are included and excluded from lease payments? REPORT N GO
Include at commencement date:
- Required contractual fixed payments
- Exercise price of a purchase option
- Purchase price at the end of the lease
- Only indexed or rate variable payments
- Residual value that is likely to be owed at the end of the term
- Termination penalties
May include:
- Nonlease components
Exclude:
- Guarantees of lessor debt by lessee
- Other variable lease payments
What rates should the lessee use to calculate the present value of the minimum lease payments
Use the rate implicit
If the rate is unknown, use the incremental borrowing rate
What initial direct costs are included and excluded in the valuation of ROU asset?
Include: any costs that are incurred as a result of the execution of the lease
Exclude: any costs that were incurred PRIOR to signing the lease (ex: document prep, credit checks)
What are the initial and subsequent JE’s recorded by a lessee for an operating lease?
Initial:
DR: ROU asset
CR: Lease Liability
Subsequent:
DR: Lease expense
CR: Cash/lease liability
What are the initial and subsequent JE’s recorded by a lessee for a finance lease?
Initial:
DR: ROU asset
CR: Lease Liability
Subsequent:
DR: Interest expense
DR: Lease liability
CR: Cash/lease payable
Over what period will the lessee depreciate the lease asset under a finance lease?
O or W: Asset’s useful life
N, E, or S: Shorter of the lease term or asset’s useful life
In finance or operating leases, which cash flows are operating cash flows and which are financing cash flows?
Finance leases: interest payments and variable or short term lease payments not included in the lease liability are cash flows from operations
Principal payments are cash flows from financing
Operating leases: lease payments, variable lease payments, and short term lease payments are all cash flows from operations
When is a lease classified as a finance lease? (OWNES)
If any one of the following are met:
O - The lease transfers ownership to the lessee by the end of the lease term.
W - The lease contains a written purchase option that the lessee is reasonably certain to exercise.
N - The present value at the beginning of the lease term of the “minimum lease payments” equals or exceeds the fair value of the leased property (generally 90 percent of FV is the minimum threshold).
E - The lease term is the major part (75 percent or more) of the estimated economic life of the leased property.
S - The asset is specialized such that there is no alternative use to the lessor.
When should the lessee begin recognition of lease payments?
on commencement of the lease which is when the asset is made available to the lessee for use
