Leases

Question 1

terminology for capital vs finance lease

Answer 1

Finance lease - IFRS

Capital lease - ASPE

Question 2

Finance lease

Answer 2

one that transfers substantially all of the risks and rewards of ownership to the lessee

Question 3

Criteria for finance lease

Answer 3

1. Title transfers to the lessee by the end of the lease term
2. Bargain purchase option exists
   
   • reasonably certain that the lessee will exercise it
3. Lease term is for the major part of the economic life of the asset (75%)
   
   • will receive substantially all of the economic benefits expected to be derived from the use of asset over its life span
4. PV of min lease payments
5. Asset is specialized

Question 4

PV of min lease payments

Answer 4

=PV(RATE, NPER, PMT, FV, TYPE) > 90% of FMV of asset, criteria is met

Rate: implicit, if not known then use the lessee’s incremental borrowing rate

• for ASPE: use the lower of.

PMT - lease payments excluding any executory costs

FV - expected pmt at end of lease. BPO or guaranteed residual value

TYPE: pmts of lease at beg or end

• 1- beg
• 0- end

Question 5

BPO

Answer 5

an option to purchase the asset at the end of lease term at a specified price that is substantially lower than FMV

Question 6

GRV (guaranteed residual value)

Answer 6

the amount the lessee promises that the lessor can sell the asset for at the end of the lease term

Question 7

UGRV

Answer 7

if the lessee has no liability to ensure the amount the lessor will receive for the asset

Question 8

Finance lease

Initial recognition

Answer 8

DR Leased asset

CR Lease obligation

recorded at PV of min lease payments + PV of BPO/GRV

(cannot be recorded at an amount higher than FMV)

if both BPO, GRV, use the BPO.

Question 9

Finance lease

Depreciation

Answer 9

Depreciated over the lesser of:

• lease term
• assets useful life

If BPO, depreciate over useful life

DR Amortization expense

CR Leased asset (accum depreciation)

Question 10

Finance lease

Lease pmts + interest

Answer 10

Lease payments:

DR Lease obligation

CR Cash

Interest expense:

If pmt due at beg: (lease obligation at end yr) x int rate used to capitalize the lease

• If capitalized at FMV, use implicit rate

If pmt due at end: (lease oblig at end bef pmt made) x int rate to capitalize lease

DR Int exp
CR Lease obligation

Question 11

Finance lease

Derecognition

Answer 11

If FV of asset > previously expected RV, a gain on I/S

If FV of asset < previously expected RV, not guaranteed, loss to I/s

If FV of asset < previously expected RV, guaranteed.

• the lessee/third party guarantor is called upon to make up the difference. no g/l recorded

Question 12

Finance lease (POV lessor)

Answer 12

DR Lease receivable (pv of lease pmts, FV= URV)

DR COGS (COGS - pv of urv)

CR Revenue

CR Equipment (inventory)

Question 13

Criteria capital lease

Lessee
ASPE 3065.06

Any of the following are met

Answer 13

Must meet one of the criteria:

• Transfer of ownership or bargain purchase option at the end of the lease term
• Lease term is at least 75% of the economic life of the asset
• PV of min lease payments at least 90% of FV of leased asset

Discount rate = lower of:

• Lessee’s incremental borrowing rate
• Implicit rate in the lease