INT ACCT CH 15: Leases

What is the lessor's discount rate when determining the present value of the minimum lease payments? What is the lessee's discount rate?

The lessor's discount rate is the effective interest rate the lease payments provide the lessor over and above the "price" at which the asset is "sold" under the lease. It is the desired rate of return the lessor has in mind when deciding the size of the lease payments. When the lessor's implicit rate is unknown, the lessee should use its own incremental borrowing rate. When the lessor's implicit rate is known, the lessee should use the lower of the two rates. This is the rate the lessee would be expected to pay a bank if funds were borrowed to buy the asset.

What are the required lease disclosures for the lessor and the lessee?

Virtually all aspects of the lease agreement must be disclosed. For all leases (a) a general description of the leasing arrangement is required as well as (b) minimum future payments, in the aggregate and for each of the five succeeding fiscal years. Other required disclosures are specific to the type of lease and include residual values, contingent rentals, sublease rentals, and executory costs

Can the present value of minimum lease payments differ between the lessor and lessee?

Yes, the minimum lease payments for the lessee exclude any residual value not guaranteed by a third party guarantor. Even when minimum lease payments are the same, their present values will differ if the lessee uses a discount rate different from the lessor's implicit rate. This would occur if the lessee is unaware of the implicit rate or if the implicity rate exceeds the lessee's incremental borrowing rate.