LEASES (F6 M1-M3) Flashcards
In an OPERATING lease, the LESSEE records
-rent expense only on an accrual basis (usually straight line)
DR. rent expense
CR. cash/rent payable
Leasehold improvement
- permanently affixed to the property and reverts back to lessor at the termination of lease. (painting on a wall is not a leasehold improvement)
- not moveable from premise
- ex: air conditioning ducts, tiles.
Lessee treatment of leasehold improvement
capitalize and depreciate over the LESSER of the lease life or the asset/improvement life
Lease bonus
- Prepayment for future expenses
- LESSEE records as an asset (deferred charge) and amortizes over life of lease.
- LESSOR records as a liability and amortizes to income over life of lease
Rent kicker
- Premium rent payment (percentage of sales)
- Period expense
Refundable security deposit
- LESSEE reports as an asset (receivable) until refunded
- LESSOR records as a liability
Nonrefundable security deposit
- LESSEE records as an asset (prepaid lease expense) until lessor determines that it has been earned
- LESSOR records as unearned revenue until earned
LESSEE JE for free/reduced rent
First 6 months of a 5 year lease is free:
-months 1-6:
Dr. rent expense
Cr. rent payable
-months 7-60:
Dr. rent expense
Dr. rent payable (reverses above)
Cr. cash
rent expense stays the same throughout the lease
In an operating lease, the LESSOR records
- rental income on accrual basis
- depreciation expense
LESSOR JE for free/reduced rent
First 6 months of a 5 year lease is free:
-months 1-6:
Dr. rent receivable
Cr. rent income
-months 7-60:
Dr. cash
Cr. rent receivable (reverses above)
Cr. rent income
rent income stays the same throughout the lease
Operating lease disclosures
For LONG TERM leases (greater than one year):
-minimum future rental payments per year for next 5 years and TOTAL rental payments in aggregate
ALL operating leases:
- schedule of total rental expense
- basis of rent kicker (contingent rental payments)
- terms of renewals, purchase options, and escalation clauses
- restrictions imposed by lease agreement
LESSEE capital lease criteria and treatment
Meet one of four:
- ownership transfers at the end of the lease
- written option for bargain purchase
- PV of lease payments >= 90% of FV of leased property (do this one last)
- lease term >= 75% of asset’s economic life
if met:
- must record asset and depreciation/liability and interest expense
- no rent expense
Dr. Fixed asset
Cr. Liability - obligation under capital lease
Capitalized amount for LESSEE under capital lease
Lessee records an asset/liability at the LESSER of:
- fair value of asset at inception of the lease
- cost (PV of minimum lease payments)
Minimum lease payments calc
using lower of rate implicit in the lease (if known) and lessee’s incremental borrowing rate
PV of annuity of required payments
+ PV of 1 of bargain purchase option
+ PV of 1 of guaranteed residual value
if annuity due, 1st payment all goes to principal reduction
Executory costs
insurance, maintenance and taxes
excluded under gaap.
added to capitalized amount under IFRS
Depreciation for LESSEE under capital lease
capitalized lease assets
-salvage value
/periods of benefit
periods of benefit =
OW = life of asset
NS = life of lease
Depreciable life under capital lease
under both gaap and ifrs:
periods of benefit =
OW = life of asset
NS = life of lease/lease term
Capital lease disclosures
- assets, accumulated amortization and liabilities
- current amortization charges to income
- gross amount of assets recorded under capital lease
- future minimum lease payments in aggregate and for each of the next 5 years showing deductions for executory costs
LESSOR capital lease criteria
under GAAP, must meet all three:
- Lessee “owns”
- uncertainties do not exist regarding unreimbursable costs
- collectibility is reasonably predictable
Under IFRS, lessor copies lessee
sales type capital lease
FV > CV so profit on sale and interest income recognized
direct financing lease
FV = CV so no profit, just interest income
LESSOR - recording sales type lease
2 JE
Dr. lease payments receivable
Cr. Unearned interest income
Cr. Sales Revenue
Dr. COGS
Cr. Asset
- lease payments receivable = gross investment = # of payments * pmt $
- unearned interest income = different between undiscounted and discounted FCF (gross investment - net investment)
- sales revenue = net investment = PV of gross invesment = present value of minimum lease payments (also = FV = cash selling price)
LESSOR - recording direct financing lease
1 JE
Dr. lease payment receivable
Cr. Unearned interest revenue
Cr. Asset
Profit on sale-leaseback when PV of pmts >= 90% of FV
- usually considered a capital lease
- defer ALL gain and amortize over asset life
Profit on sale-leaseback when PV of pmts >10% and <90% of FV
- could be operating or capital lease
- recognize EXCESS gain only. defer/amortize the rest
sales price
=tentative gain
=excess gain
Profit on sale-leaseback when PV of pmts <10% of FV
- usually considered an operating lease
- recognize all gain, defer zero
operating lease excess profit in sale-leaseback
sale price
=tentative gain
*
=excess profit (recognize now)
*leaseback asset = PV of minimum lease payments
operating lease excess profit in sale-leaseback
sale price
=tentative gain
*
=excess profit (recognize now)
*leaseback asset = PV of minimum lease payments
Treatment of LOSS in sale-leaseback
- if real economic loss (FV < BV), recognize immediately
- if artificial loss (SP < FV), defer and amortize over leaseback period
Amortization of gain in CAPITAL sale-leaseback
amortize over ASSET LIFE
lessee “owns”
Amortization of gain in OPERATING sale-leaseback
amortize over LEASE LIFE
lessee does NOT “owns”
treatment of sale-leaseback gain under IFRS
Finance Lease - lessee “owns”: defer all profit and amortize over lease term
Operating lease - lessee does not “owns”: recognize gain
