Module 28.4: Lease and Pension Accounting Flashcards
What are the three main advantages of leasing over purchasing?
1) Less costly financing - interest rate implicity in a lease may be lower than cost of funds.
2) Less restrictive provisions - terms of lease may be less restrictive
3) Less risk of obsolescence - the leassee does not bear the risk of unexpected asset value decline.
How is a long term lease reported on balance sheet under IFRS?
What about short term?
an asset and a liability equal to the present value of the promised lease payments are reported on the balance sheet.
Short term leases are not reported on balance sheet and rent expense is recorded.
Under US GAAP how are leases classified and reported?
can be either finance lease or operating lease.
if benefits and risks of ownership have been substantially transferred to the lessee, then it’s a finance lease.
Finance leases are reported like a long term lease under IFRS.
Under US GAAP, how are operating leases accounted for?
same as finance lease (long term lease under IFRS) except the entire lease payment is recorded as a lease expense on the income statement. Both coupon payment and amort payment on the income statement, but the amort payment is used to reduce the balance sheet liability.
Under IFRS can lease payments be CFOA or CFFA? What about GAAP?
either, but under GAAP it’s only operating cash flow.
explain how lessors report a lease on their balance sheet under IFRS.
under IFRS there are two classifications - a finance lease and an operating lease.
finance lease - asset is removed from BS, lease receivable is added equal to the value of the expected lease payments and any estimated residual value.
operating lease - the lessor reports lease payments as income and depreciation and other costs as expenses.
What are the three types of leases for a lessor under GAAP?
sales type lease - meets the transfer of ownership criteria and collection is probable.
direct financing lease - (i) the transfer of ownership is not met (ii) a third party guarantees the residual value (iii) the sum of the promised lease payments and the asset’s residual value is greater than or equal to the fair value.
Operating leases - if it does not quality as sales-type or direct financing, it is operating.
What is the financial statement treatment for sales-type leases under US GAAP?
same as Finance lease under IFRS
Income Statement - revenue interest portion of lease payments, value of lease receivable, and COGS as expense
Balance Sheet - derecognize the asset
Cash flow - principal portion of lease payment is CFO inflow if leasing is lessor’s primary business, if not CFI. Interest portion is CFO or CFI (IFRS).
What is the financial statement treatment for a direct financing lease (US GAAP)
Income statement - revenue is the interest portion of lease payments
Balance sheet - derecognize leased asset, recognize lease receivable
Cash flow statement - principal portion is CFO if leasing is primary business, otherwise CFI. Interest portion is CFO.
How are operating leases accounted for under US GAAP?
Same as IFRS
Income statement - revenue is lease payments and expense is depreciation
Balance Sheet - asset remains on balance sheet
Cash flow - entire lease payment is a CFO inflow.
What is a defined pension plan? what is the financial statement impact?
a retirement plan in which the firm contributes a sum each period to the employee’s retirement account.
pension expense is equal to the employer’s contribution. no balance sheet liability.
what is a defined benefit pension plan? what is the financial statement impact? when is a net pension asset or net pension liability recorded?
make periodic payments to the employees after retirement.
employer must estimate the value of future obligation..
net pension asset is when the plans asset value is greater than the pension obligation. vice versa for pension liability.
where are the change in net pension asset or liability recognized under IFRS and GAAP?
What about for manufacturing companies?
component costs go directly to equity as OCI are amortized to the income statement under GAAP, but not under IFRS.
Pension expense is allocated to inventory expense and does not show up as a single line item.
