Leases Flashcards
Sales- Type Lease: Lessor
the lessor recognizes two types of revenue: the gain or loss on the sale (lease) of the asset and the interest income from the collection of the lease payment.
Sales - Type Lease: Unearned Interest Revenue
amortized over the life of the lease using the effective interest rate method on the receipt of the periodic lease payments.
Leases: Fair Value Option
does not apply to financial assets and liabilities
Finance Lease Criteria
one of the following criteria:
• Present Value equals or exceeds substantially all (90%) of the Fair Value
• Option to Purchase (exercise is reasonably certain)
• Economic Life - Major part (75%) of asset’s economic life is used
• Transfer of Ownership at lease termination
• Specialized Nature - No alternative use to the lessor at lease termination
Sale - Leaseback Transaction
the transfer of the asset must meet the requirements for a sale per the Revenue Recognition standards. If there is no sale for the seller-lessee, the buyer-lessor also does not account for a purchase.
Lease Payment Calculation: Guaranteed Residual Value
the lessee would only include the amount that it is probable that the lessee will owe under the residual value guarantee at the end of the lease term.
Sales - Type Lease: Lessor Criteria
when the lease meets any one of the following criteria at lease commencement (these are the same criteria for a Finance Lease):
• Present Value equals or exceeds substantially all (90%) of the Fair Value
• Option to Purchase (exercise is reasonably certain)
• Economic Life - Major part (75%) of asset’s economic life is used
• Transfer of Ownership at lease termination
• Specialized Nature - No alternative use to the lessor at lease termination
Lessee: Operating Lease
unless the following criteria are met, in which case the leaseholder should classify it as a direct financing lease:
• The present value of the sum of the lease payments and any residual value guaranteed by the lessee which is not already reflected in the lease payments and/or any third party unrelated to the lessee is equal to or substantially exceeds the fair value of the underlying property.
• It is probable that the lessor is likely to collect the lease payments plus any amount required to meet the residual value guarantee.
Rent Income Receivable
divided evenly over each period in line with matching principle regardless of the pattern of payments. Whether payments increase or decrease during the term of the lease, or whether the lease contains periods that may be rent-free, or involves nonrefundable deposits,
Finance Lease: Lessee
At a Finance Lease inception, the lessee records an ROU Asset and corresponding lease liability at the present value of the lease payments not yet paid.
Sale - Leaseback: Profit on Sale
reported for the excess of the present value of the minimum lease payments over the carrying amount of the equipment. The list price of the equipment is irrelevant.
Short Term Lease
recognizes lease payments as an expense on a straight-line basis over the lease term and does not recognize a lease liability or ROU asset on its balance sheet).
Lease Bonus
deferred (prepaid) rent and amortized using the Straight-Line Method (SLM) over the lease term.
Customer Control over Asset
- Customer has legal title
- Customer has physical possession
- Customer has the significant risks and rewards of ownership
- Customer has accepted the asset
- Seller has a present right to payment.
Executory Costs
recurring expenses, which if incurred by the lessee, is expensed as incurred.
Initial Measurement of Lease Asset
(regardless of lease classification) is calculated as the lease liability, increased by any initial direct costs and prepaid lease payments, reduced by any lease incentives received before commencement.
Depreciation: TT or BPO (Finance Lease)
lessee would depreciate the leased equipment over the useful life of the asset.
Direct Financing Lease: Lessee
does not individually obtain control of the asset but the lessor does relinquish control.
This would occur if (1) the present value of the lease payments and any residual value guarantee (which could be provided entirely by a third party or consist of a lessee guarantee coupled with a third-party guarantee) represents substantially all of the fair value of the underlying asset and (2) it is probable that the lessor will collect the lease payments and any amounts related to the residual value guarantee(s).
Net Investment in Lease: Lessor
At the commencement date, a lessor shall recognize a net investment in the lease (PV of Lease payments not yet received + PV of guaranteed and unguaranteed residual value – Selling Profit).
Lease Payments
- Fixed Lease Payments
- Variable Lease Payments
- Renewal, Purchase, and Termination Option Payments
- Fees Paid to Owners of Special-Purpose Entities
- Residual Value Guarantees
Lease Payments don’t include:
• Payments for variable leases not dependent on an index or rate
• Guarantee of the Lessor’s debt
ROU Asset: Initial Measurement
(regardless of lease classification) is calculated as the lease liability, increased by any initial direct costs and prepaid lease payments, reduced by any lease incentives received before commencement.
Residual Value Guarantee
a commitment to compensate the lessor for a shortfall in the value of the underlying asset at the end of the lease term.
Initial Direct Costs
deferred and amortized over the term of the lease as the lease income is recognized.
Lessor Recognition (After Commencement Date)
- The lease payments as income in profit or loss over the lease term on a straight-line basis.
- Variable lease payments as income in profit or loss in the period in which the changes in facts and circumstances on which the variable lease payments are based occur
- Initial direct costs as an expense during the lease period on the same basis as income from the lease.
ROU Asset Amortization Period: Finance Lease
from the lease commencement date to the end of the lease term or the end of the asset’s useful life, whichever is earlier.
Finance Lease: Lessee
Lease liability (Present value of lease payments not yet paid)
+ Initial direct costs (Costs that are directly attributable to negotiating and arranging the lease that would not have been incurred had the lease not been executed)
+ Prepaid lease payments
- Lease incentives (Include both payments made by the lessor to or on behalf of the lessee and any losses incurred by the lessor as a result of assuming a lessee’s preexisting lease with a third party)
Selling Profit or Loss
At the lease commencement date, the lessor is required to calculate the selling profit or loss as (1) the fair value of the underlying asset (or the sum of lease receivable and any prepaid lease payments by lessee, if lower); minus (2) the carrying amount of the underlying asset net of any unguaranteed residual asset; minus (3) any deferred initial direct costs of the lessor
Definition of Control
- The right to obtain substantially all of the economic benefits from the asset.
- The right to direct (control) the use of the asset.
Lease Definition
a contract that gives a customer the right to control the use of an identified asset (PP&E) for a period of time in exchange for some form of consideration.
No Sale or Purchase
If there is no sale for the seller-lessee, the buyer-lessor also does not account for a purchase. Any consideration paid for the asset is accounted for as a financing transaction by both the seller-lessee and the buyer-lessor.
Amortization of Lease Liability (Finance Lease)
effective interest rate method.
Each lease payment is first applied to the interest on the basis of the interest rate x carrying value of the lease obligation.
Any remaining portion of the lease payment is applied towards reduction of the lease liability.
Minimum Lease Payments
Periodic lease payments
• + Required buyout of guaranteed residual value (Guaranteed Residual Value – Expected Residual Value)
• + Bargain purchase option, if any.
Rate Implicit in Lease: Not Readily Determinable
lessee should use its own Incremental Borrowing Rate (IBR) as the discount rate.
Incremental Borrowing Rate
the rate of interest that lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Disclosures: Sales Type and Direct Financing Leases
lessor must disclose the net investment components, including: future MLP; unguaranteed residual value; unearned income; and the future MLP to be received in each of the succeeding 5 years.
Disclosures: Operating Leases
lessor must disclose: the cost and carrying amount, if different, of property leased or held for leasing, by major class and total accumulated depreciation; the minimum future rentals on noncancelable leases, in aggregate, for each of the next 5 years; and a general description of leasing arrangements.
Lease Payment: Finance Lease
allocated between a reduction of the Finance Lease liability and Interest expense.
Interest Revenue
determined by applying the interest rate implicit in the lease to the lessor’s net receivable.
Lease Term
includes all periods, if any, covered by renewal periods “reasonably certain” of exercise , periods covered by a termination option reasonably certain not to be exercised and renewal periods (non-termination periods) controlled by lessor. In no case should the lease term extend beyond the date at which a bargain purchase option becomes exercisable.
