F6 - M1 & M2 Leases

Operating lease _ lessee _ lease expense_ fluctuate rate (某几个月免租金）

Lease expense must be reported on a straight-line basis. When lease rates fluctuate and when reduced costs are given, the average lease rate must be computed.

How to calculate amortization if lessee made leasehold improvements during leasing time?

Leasehold improvements should be amortized over the lesser of the remaining life of the lease, not the life of the improvement.

which rate should use to calculate the principal amount of the lease obligation for lessee?

Lessee should use the rate implicit in the lease(lessor expects return percentage on lease) if known by the lessee) to discount cash flows, calculate the principal - the PV to total payment (Annual lease payment * PV of ordinary annuity if paid at the end of each month). The residual value is not included in the calculation of the lease obligation if it is paid by a third party.

Depreciation expense v.s. Interest Revenue for Lessee and Lessor

Lessee will capitalize the lease (due to the transfer of title) and will incur both depreciation and interest expense. Lessor will earn and book interest income when the payments from lessee are received. Lessor will remove the asset from its books at the inception of the lease and will not depreciate the asset.

Finance lease - lessee - Depreciation

Rule: Capitalized equipment should be depreciated in accordance with the lessee's normal depreciation policy, not to exceed the estimated useful life, unless the lease does not transfer ownership or contain a bargain purchase option, in which case the shorter lease period should be used.

A lessee had a 10-year finance lease requiring equal annual payments. The reduction of the lease liability in Year 2 should equal the current liability shown for the lease at the end of Year 1.

Rule: Finance leases should be recorded as both an asset and liability at the present value of the minimum lease payments. The asset is depreciated. The liability is amortized using the interest method. Each payment is allocated between principal and interest. The liability is reduced by the amount of principal reduction. The lease liability should be segregated between current (due within one year) and non-current (due beyond one year). Accordingly, the reduction in lease liability each year is equal to the current liability at the end of the previous year.

For finance lease, the lessee's liability would be reduced periodically by the minimum lease payment less the portion of the minimum lease payment allocable to interest.

Rule: For a finance lease, the minimum lease payment is allocated between principal and interest using the interest rate inherent in the lease. The portion allocated to principal reduces the remaining lease liability. The process is similar to a home mortgage.

Lessee - ROU (right-of-use) asset

The ROU asset will include initial direct costs ( such as commissions paid, legal and consulting fees, etc).

Lease

The lessee shall record an operating lease as lease expense using the straight-line basis. Even though there is a variable payment, the payment is known at commencement of the lease term; therefore, the variable payments will be used in calculation of the present value of the lease liability. There is no separately recorded interest component for an "operating lease."

Lessor Accounting - Sales-Type Lease - Lessee gains control of the underlying asset.

The lessor will derecognize the asset and recognize a net investment in the lease, as well as a profit or loss.

Lessor Accounting - Direct Financing Lease

The lessor will derecognize the asset and recognize a net investment in the lease. Any gain will be deferred and amortized over the life of the lease, and any loss will be recognized immediately. Initial cost will be deferred and amortized over the lease term.

Lessor Accounting - Operating Lease

The lessor will keep the asset on its balance sheet. Includes depreciating it and recognizing any impairment charges. Initial cost will be deferred and amortized over the lease term.

Present value:

The present value of the minimum lease payments at the beginning of the lease term must be at least 90% (not 75%) of the fair value of the property at the inception of the lease.

financing liability

it is the difference between the sale price and the fair value.

If one of the five criteria is met, the lease will be classified as a sales-type lease by the lessor and finance lease by the lessee. A lease that contains a bargain-purchase option will be accounted for by the lessee as a finance lease (lessee). At least one of the following criteria must be met for a lease to be capitalized: (OWNES)

* Ownership transfers at the end of the lease; *Written purchase option the lessee is reasonably certain to exercise; * PV of minimum lease payments (Net present value)= Fair value of asset (approximately 90% of FV of leased property); * Lease term = Major part (75%) of the asset's useful life; * Asset is specialized such that it has no alternative use to the lessor.

A/D (Accumulated depreciation)

A/D is the difference between the original purchase price and the carrying value.

annual lease revenue

Annual lease revenue equals the total lease revenue from the lease allocated over the full life of the lease. Even if they have free rent lease contract on that year.

when the lease payments includes real estate taxes when pay it yearly:

Finance leases should be reported at the present value of the minimum lease payments. The lease payment is used. Taxes should be expensed when paid. The lease payment is used to compute the present value of the liability, not including costs such as taxes, which are expensed when paid.

Lessor - finance lease - interest revenue - revenue recognized

For lessor, finance lease, the interest revenue (not rent) is recognized for a finance lease, based on the discount rate times the carrying value of the lease receivable. As time passes, the lease receivable decreases and interest revenue recognized also decreases.

when to recognize loss in sale-leaseback transaction?

GAAP requires that a loss to be recognized immediately in a sales-leaseback transaction when the fair value of the property at the time of the sale-leaseback is less then book value.

Guaranteed residual value

Guaranteed residual value is, in effect, an additional lease payment and must be included in the calculation of the present value of the minimum lease payments. Since the guaranteed residual value is effectively an additional lease payment, its full value must be included in the calculation of the present value of the minimum lease payments.

Interest expense in lease

If the debt was incurred on December 31, Year 1. The initial payment was made on December 31, Year 1. No interest expense is recognized since no time has passed between when the debt was incurred and the payment was made. Thus, the full amount of the payment reduces the lease liability.

Lease term:

If the lease term is substantially less than the estimated economic life of the leased property, then term-2the lease must be accounted for as an operating lease. A lease is accounted for as a finance lease when the lease term is the major part (at least 75%) of the asset's useful life.

"failed sale"

If the underlying lease in a sale-leaseback is a finance lease, it is considered equivalent to a repurchase and will therefore be considered a "failed sale".

Assuming that no direct costs are involved, what are the components of the lease receivable for a lessor involved in a direct-financing lease?

Lessors recording a lease receivable for a direct-financing lease should include the minimum lease payments PLUS any residual value. The reason for this is because the lessor can also expect to collect this residual value from the lessee at the culmination of the lease.

Finance lease_cash flow stmt after year-end_Lessee's cash flow from operations will be:

Negatively impacted by variable lease payments not included in the lease liability. Variable lease payments not included in the lease liability are treated as cash outflows from operations and will therefore have a negative impact on bottom-line cash flow from operations.

If none of "OWNES" criteria are met, for Lessee, it is operating lease. For Lessor, depending on both of the following criteria are met: (if only one or neither are met, the lessor will classify the lease as operating).

P: Present value of the sum of the lease payments, lessee guaranteed residual value not included in the lease payment, and any third-party guaranteed residual value is equal to or substantially exceeds the underlying asset's fair value. C: Collection of the lease payments and any amounts necessary to satisfy residual value guarantees is probable.

For lessor_sales-type (finance) lease_profit

The excess of the present value of the selling price over its cost is recorded as profit. (profits =selling price / PV of payment - carrying cost on book).

Lessee accounts vs. Lessor accounts

The lessee accounts for a lease as either an operating or a finance lease. The lessor accounts for a lease as either an operating lease, sale-type lease, or direct financing lease.

With finance lease, over what period of time should the lessee amortize the leased property?

With a finance lease, the lessee should amortize the leased property over the economic life of the asset when there is a written purchase option or when the lessee takes ownership of the asset at the end of the lease term.