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
Treatment of lease bonus
Deferred and recognized over the life of lease on straight line basis
Lease disclosure requirements
Disclose future minimum lease payments for 5 years and lease term in aggregate. Minimum lease payment excludes variable costs
How are scheduled rent increases treated
Straight line of uneven lease payments
Depreciable life of leasehold improvements (lessee)
Depreciated over lesser of lease term or useful life
Treatment of leasehold improvements under lease with renewal option
Depreciate over original and renewal period of renewal is probable
Calculate total interest revenue over life of lease
Total lease payment - FV of leased asset
What do direct financing leases recognize
Interest revenue
How is gain and interest treated and calculated in sales type lease
Lessor recognizes gain
Gain = PV of lease payments or selling price - Cost
Interest = SP - downpayment x interest rate x time
What is unearned income on sales type lease
Gross investment - sum of PV of gross investment components
What is unearned income on direct financing lease
Gross investment - cost (PV of lease payments
Revenue recognition of sales type lease requires what method
Interest method, constant rate of return
How does lessee record leased asset and lease obligation
Lower of PV of minimum lease payments or FV
Rate used for PV of minimum lease payments
Lower if incremental borrowing rate or lessors implicit rate if known by lessee
What is included in minimum lease payments
Rentals, lessee guaranteed residual value or bargain purchase option
What is a bargain purchase option
Option to purchase asset for less than FV
When is guaranteed residual value included in minimum lease payments
Of guaranteed by lessee and not 3rd party
How are a lessee’s annual executory expenses treated
Executory expenses (ie real estate taxes) are expense as incurred and excluded from minimum lease payments
How is equipment under capital lease depreciated?
By lessee over the useful life of the asset
Bargain purchase option treatment at end of lease term
Remains in lease payable
What is a sale leaseback and how is gain or loss treated
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)
Sales leaseback exceptions to deferred gain
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
Treatment of sales leaseback gain for more than minor part but less than substantially all
Recognize gain except for PV of lease payments - amortize
When to recognize sale leaseback losses
If CV > FV recognize immediately
If SP < CV but FV > CV defer loss
When is a lease an operating lease even though substantially all the remaining use of the leased asset is retained by the lessee
When lease term begins within last 25% of assets original life
How is a deferred gain treated and how does it represent the lease transaction
Acts like a valuation allowance
Net amount shown for leased asset being equal to the same CV as if sale leaseback did not occur
How is lease termination penalty recorded
Current expense in continuing ops
How is a modification from capital lease to operating lease treated
As a sale leaseback transaction
How is lease of land treated under IFRS
If land doesn’t transfer at end of lease, record land as operating lease even of building is a financing lease
