Set 3 - FR Chapter 8 Leases Flashcards
How are finance leases treated at inception? What are the journals? From point of view of lessee are all treated like this?
Capitalized - DR Rou asset, CR Lease liability. YES unless low-value or less than a year.
What is the date of commencement? What happens then?
When lessee has right to use asset. Asset is recognized on books.
What costs are included in the initial measurement of the lease?
- initial measurement of the lease liability
- any lease payments made at or before commencement date
- any initial direct costs incurred by lessee
- estimate of costs to be incurred at end of lease to restore asset to condition required under contract OR to dismantle
How is the initial measurement of lease liability calculated?
PV of future payments
What discount rate is used?
The one implicit in lease, if known. If not known, use incremental borrowing rate.
Define fixed payments. Are they included in lease liability?
PAyments due periodically at a set amount. Yes.
Variable payments - define. Are they included in lease liabiility?
Payments which are different dependant upon external factors (interest rate/exchange rate etc). Yes if the rates are based on index - use rate at commencement date. No to the rest, they are expensed.
Define BPO - are these included in minumum lease payments?
An option to purchase the asset at an amount below FMV at end of lease. Included if it is likely that entity will take up the BPO.
Define guaranteed residual value. Included in minimum lease payments?
Amount lessee guarantees to be able to sell asset for at end of the term. Yes, but only the expected amount to pay if less than the actual payment.
Define unguaranteed residual value. Included?
No guaranteed amount to be paid at end of term. Not included.
Termination penalties - included in lease liablity?
Yes, but only if the term of the lease means this will be paid.
Are non-lease component costs included?
No, unless elected.
What are the two methods of subsequent measurement?
Cost or revaluation
Depreciation - what is used as length of depreciation? What happens if there is a guarantee that ownership will be transferred as in a BPO?
Lesser of useful life of asset or lease term.
IF BPO exists then have to use life of asset.
How are residual values calculated for deprecation?
Included in the amount. We do not do COST - RESIDUAL VALUE to determine cost.
What are the two other journals required, other than depreciation?
DR lease liability, CR cash (as payments made)
DR interest expense, CR lease liability (financing expense to bring asset up to FV eventually)
If interest paid at beginning of year, how is interest calculated? And at end?
End of previous year lease liability - lease payment x int rate.
Current year lease liability x int rate.
Lease liability remeasurements - treatment
FV discounted to reflect new payments, then asset and liability adjusted.
How are low-cost leases treated? Criteria
If less than one year, can expense over a straight-line basis. Must:
- be of low value when new
- lessee can benefit from asset on its own or together with readily available resources
- not be integrated with other assets
Derecognition - no guarantee residual value - asset returns to owner
DR acc dep - ROU asset
CR ROU asset
Derecognition - guaranteed residual value - asset returns to owner
DR Acc dep , CR ROU asset.
DR lease liability (For guaranteed payment), CR Gain/loss (if different to remaining lease liablity balance, CR cash)
Derecognition - lease agreement extended with new terms
ROU and lease liability remeasured
Derecognition - no BPO - asset transfers to lessee
DR asset (NBV), DR acc dep - ROU asset, CR ROU asset
Derecognition - BPO - asset transfers to lessee. How is asset measured on books?
DR asset (NBV), DR acc dep, CR ROU asset DR lease liability (amount of BPO), CR cash
IF BPO NOT PAID, the difference is put to gain/loss
Disclosures required
- dep and int exp related to ROU assets
- expense related to short-term, low value and variable payments
- additions to ROU assets
- any gain or loss on sale-leasebacks
- details of lease arrangements
LESSOR’s perspective - two types of lease?
Operating or finance
Criteria to determine op vs finance lease for LESSOR. ONLY ONE NEEDED
The criteria / consideration factors for a finance lease can be summarized as follows:
- Title transfers to the lessee by the end of the lease term.
- A bargain purchase option exists, and at the date the lease begins, it is reasonably certain that the lessee will exercise it.
- The lease term is of such a duration that the lessee will receive substantially all the economic benefits expected to be derived from the use of the leased property over its lifespan.
- The present value (PV) of the minimum lease payments amounts to substantially all of the fair value (FV) of the asset.
- The asset is specialized in nature and only the lessee can use it without major modification
Secondary criteria for ops vs finance lease
- lessee can cancel lease and lessor’s losses are borne by lessee
- gains or losses from FV fluctuation of residual accrue to lessee
- lessee has ability to continue lease for secondary period at much lower rate
If finance lease determined, what are the entries
DR lease receivable (PV of minimum lease paymnts)
DR COGS (cost of inventory)
CR Revenue
CR equipment (to remove from books)
Other entries for lessor finance lease
DR Cash
CR lease receivable (when payments received)
DR lease receivable
CR int income (financing component)
entries if classified as operating lease (revenue)
DR cash
CR deferred rent revenue (at time of payment)
DR deferred rent revenue
CR rent revenue (at year-end, assuming payment made at beginning of year)
entries if classified as operating lease (equipment)
DR equipment - lease CR inventory (to move asset out of inv and into lease asset)
DR dep expense (straight-line over useful life of asset)
CR acc dep equipment - lease
Derecognition - asset transferred to lessee
lease payments cover off the lease receivable and asset is zero.
Derecognition - asset not transferred to lessee
gain or loss may occur
first step in assessing sale and leaseback criteria
has a sale actually occurred?
under what conditions has a sale NOT taken place
- The seller-lessee has an obligation to repurchase the asset.
- The seller-lessee has a right (an option) to repurchase the asset.
- The seller-lessee has an obligation to repurchase the asset at the buyer-lessor’s request for an amount less than the original selling price of the asset.
- The seller-lessee can or must repurchase the asset at the buyer’s request, for an amount equal to or more than the original selling price of the asset, and this amount is greater than the asset’s expected market value.
no sale - seller-lessee implications
seller recognizes asset. recognizes loan payable to ammount received from buyer. as lease payments made, interest expense recognized and loan reduced.
no sale - buyer lessor implications
buyer recognizes loan receivable equal to amounts paid to seller. as payments received, interest expense recognized to bring receivable down.
sale - seller-lessee implications
seller derecognizes asset. amount of gain recognized at sale is limited to the portion of claims on asset that were transferred to buyer. lease recognized as ROU asset and lease liability.
sale - buyer lessor implications
buyer recognizes asset that purhcases. provided asset bought at FMV and market interest rates, then accounted for using op or finance lease criteria.
proportion of claim on asset retained by seller-lessee
PV of lease payments / FV of asset given up
buyer-lessor proportionate claim
fmv of asset sold - PV of lease payments / FMV of asset
ROU asset - after sale and leaseback assuming sale
(PV of lease payments / FV of asset given up) x book value of asset given up
gain on sale recognized assuming sale after sale-leaseback
buyer-lessor proportionate claim x (FMV of asset sold - book value of asset sold)
ASPE differences - classification
ASPE classifies all leases as either operating or capital using specific criteria.
ASPE differences - criteria for lessee
- reasonable assurance title will pass at end or there is a BPO
- lease term is a major portion of asset useful life (75% or more)
- PV of minimum lease payments is equal or substantially more than all FV of asset (90%+)
IF ONE CRITERIA MET, THEN CAPITAL and rou/lease liability set up. If not, operating and expense as incurred.
ASPE differences - criteria for lessor
Same as Lessee PLUS
- credit risk is normal when compared to risk of similar receivables AND
- amounts of any unreimbursable costs that are likely to be incurred by lessor can be reliably estimated
ASPE differences - non lease costs
MUST be removed from minumum lease payments calculations - IFRS allows option to include
ASPE differences - discount rate used
lower of: rate implicit in lease and entity borrowing rate
ASPE differences - recognition amounts
cannot be initially recognized at a higher amount than FV. IF this is the case, discount rate adjusted so that PV of minimum lease payments equal to FV of leased asset.
ASPE differences - impairment
not tested unless signs of impairment. IFRS tested annually.
