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FAR 2014 > Leases > Flashcards

Leases Flashcards

1
Q

How is a Capital Lease recorded?

A

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

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2
Q

What footnote disclosures are required for a Capital Lease?

A

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

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3
Q

What are the requirements for a Capital Lease for a lessor?

A

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

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4
Q

What are the characteristics of an Operating Lease for a lessee?

A

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.

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5
Q

What are the characteristics of an Operating Lease for a LESSOR?

A

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

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6
Q

What are the characteristics of a Direct Financing Lease?

A

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

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7
Q

How is a sale-leaseback recorded?

A

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

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8
Q

What are the characteristics of lease payments under an annuity due situation?

A

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

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9
Q

What are the characteristics of lease payments under an ordinary annuity situation?

A

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

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10
Q

What are the characteristics of a Capital Lease for a lessee?

A

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

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11
Q

Treatment of lease bonus

A

Deferred and recognized over the life of lease on straight line basis

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12
Q

Lease disclosure requirements

A

Disclose future minimum lease payments for 5 years and lease term in aggregate. Minimum lease payment excludes variable costs

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13
Q

How are scheduled rent increases treated

A

Straight line of uneven lease payments

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14
Q

Depreciable life of leasehold improvements (lessee)

A

Depreciated over lesser of lease term or useful life

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15
Q

Treatment of leasehold improvements under lease with renewal option

A

Depreciate over original and renewal period of renewal is probable

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16
Q

Calculate total interest revenue over life of lease

A

Total lease payment - FV of leased asset

17
Q

What do direct financing leases recognize

A

Interest revenue

18
Q

How is gain and interest treated and calculated in sales type lease

A

Lessor recognizes gain
Gain = PV of lease payments or selling price - Cost
Interest = SP - downpayment x interest rate x time

19
Q

What is unearned income on sales type lease

A

Gross investment - sum of PV of gross investment components

20
Q

What is unearned income on direct financing lease

A

Gross investment - cost (PV of lease payments

21
Q

Revenue recognition of sales type lease requires what method

A

Interest method, constant rate of return

22
Q

How does lessee record leased asset and lease obligation

A

Lower of PV of minimum lease payments or FV

23
Q

Rate used for PV of minimum lease payments

A

Lower if incremental borrowing rate or lessors implicit rate if known by lessee

24
Q

What is included in minimum lease payments

A

Rentals, lessee guaranteed residual value or bargain purchase option

25
Q

What is a bargain purchase option

A

Option to purchase asset for less than FV

26
Q

When is guaranteed residual value included in minimum lease payments

A

Of guaranteed by lessee and not 3rd party

27
Q

How are a lessee’s annual executory expenses treated

A

Executory expenses (ie real estate taxes) are expense as incurred and excluded from minimum lease payments

28
Q

How is equipment under capital lease depreciated?

A

By lessee over the useful life of the asset

29
Q

Bargain purchase option treatment at end of lease term

A

Remains in lease payable

30
Q

What is a sale leaseback and how is gain or loss treated

A

Treated as though two transactions were a single financing transaction

Gain or loss is deferred and amortized over lease term (if asset to lessor) and economic life (if asset to lessee)

31
Q

Sales leaseback exceptions to deferred gain

A

PV of lease payment is 10% or less of FV of sale leaseback property
Leaseback is more than a minor part but does not meet capital lease requirements

32
Q

Treatment of sales leaseback gain for more than minor part but less than substantially all

A

Recognize gain except for PV of lease payments - amortize

33
Q

When to recognize sale leaseback losses

A

If CV > FV recognize immediately

If SP < CV but FV > CV defer loss

34
Q

When is a lease an operating lease even though substantially all the remaining use of the leased asset is retained by the lessee

A

When lease term begins within last 25% of assets original life

35
Q

How is a deferred gain treated and how does it represent the lease transaction

A

Acts like a valuation allowance

Net amount shown for leased asset being equal to the same CV as if sale leaseback did not occur

36
Q

How is lease termination penalty recorded

A

Current expense in continuing ops

37
Q

How is a modification from capital lease to operating lease treated

A

As a sale leaseback transaction

38
Q

How is lease of land treated under IFRS

A

If land doesn’t transfer at end of lease, record land as operating lease even of building is a financing lease

FAR 2014 (19 decks)

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