Ch 15 Leases

Operating lease

- Doesn't meet any criteria to be considered a sales-type lease - Lessee assumes no risk of ownership (lessor does not take the asset off it's books) - Each lease payment is classified as rent expense - At end of lease term, right to use the property reverts back to the lessor - The lessor does not record a journal entry at issuance

Lease disclosure requirements

- Virtually all aspects of the lease agreement must be disclosed. - Lessees and lessors must provide disclosures that enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. - Information disclosed is both qualitative and quantitative.

Factors that might create an economic incentive for the lessee includes:

- bargain renewal rates - penalty payments for cancellation or non-renewal - economic penalties such as significant customization or installation costs

Short-term lease

- has lease term of 12 months or less - does NOT contain a purchase option that lessee is reasonable certain to exercise

for a purchase option

-we assume the lease term ends on the date the option is expected to be exercised -the lessee and the lessor consider the exercise price of the option to be an additional cash payment -lease classified as finance/sales-type

residual

A lease agreement can include a guarantee by the lessee that the lessor will recover a specified ___ value, including cash if the asset doesn't meet sufficient value

useful life

Cost of a leasehold improvement is amortized or depreciated over its ___ ___ to the lessee

Sales-type lease w/ selling profit w/ residual value

Dr. Lease Receivable Dr. COGS = cost - PV of residual Cr. Sales Revenue = lease receivable - PV of residual Cr. Equipment (at cost)

Lessee Leases

Finance Lease Operating Lease

finance

For a ____ lease: the lessee amortizes the right to use the asset over the lease term.

non-debt liability

For operating leases: lease payable is a

lessor

For operating leases: the ____ must depreciate the asset over it's useful life while the lessee amortizes the amount of the lease payable.

"small ticket" leases

IFRS allows these type of leases under $5,000 to be accounted for under the short-cut method

purchase

IFRS precludes a lease from being considered short-term if the lease includes a ___ option regardless of whether the lessee is reasonably certain to exercise it.

increase

If and when lease payments ___, the change in the lease payments has no effect on balance sheet accounts and simply is reported as a separate lease expense (lessee) and lease revenue (lessor).

expected

If the actual residual value is less or more than the ____ residual, the lessor would record a *loss or a gain*.

right-of-use asset

Initial direct costs that are incurred by the lessee are added to the ___-__-__.

excluding

Lessee records a right-of-use asset and lease liability for the present value of the lease payments ___ the nonlease components

permitted

Lessors are NOT ___ to reassess the initial determination of the lease term or discount rate.

triggering event

Reassessment requires a "___ ___" such that the lessee now has an economic incentive to exercise an option that extends or terminates the lease.

Lessor Leases

Sales Type Lease (with or without profit) Operating Lease

examples of non-lease components

Service contracts Maintenance Hazard insurance Property taxes

guarantee

Sometimes a lease agreement includes a ___ by the lessee that the lessor will recover a specified residual value.

implicit rate

The ___ ___ is used to consider the time value of money while calculating the present value. This is the desired rate of return that the lessor has in mind when deciding the amount of the lease payments.

lease term

The amortization period is restricted to ___ ___ UNLESS the lease provides ownership transfer or bargain purchase option. In those cases, the asset should be amortized over its remaining life.

reasonably certain

The contractual lease term is adjusted for any periods covered by options to extend or terminate the lease for which exercise is deemed to be "___ ___".

amortization expense

The lessee incurs an ___ ___ as it uses the asset.

amortize

The lessee must ___ the right of use asset.

unaffected

The lessee's accounting is ___ by the *residual value* other than its causing the payments to be lower.

BOTH

U.S. GAAP and IFRS allows the lessee to elect not to record a right-of-use asset and lease payable at the beginning of the lease term, but instead to simply record lease payments as expense as they occur.

IFRS

Under ____, only lessors apply the classification criteria to distinguish between finance and operating leases, all leases are accounted for as finance leases by the lessee.

incremental borrowing

When the lessor's implicit rate is unknown, the lessee should use its own ___ ___ rate. (the rate the bank would charge)

required

When there is a change in the lease term, lessees are ___ to reassess the classification of the lease.

amount to be recovered through periodic lease payments

amount to be recovered (fair value) - present value of residual value

non-lease components

charge that represents a transfer of a good or service to the lessee, should be separate from lease payments

initial direct costs

costs that are associated directly with originating a lease and are essential to acquire the lease

payment

if residual value is NOT guaranteed by lessee or is, but does NOT differ from expected residual, then it does not affect journal entries other than calculation of each lease ___

present value

lessee-guaranteed residual: ___ ___ of that payment is included with both the right-of-use asset and the lease liability

(assuming a sales-type lease)

lessee-guaranteed residual: lessor will include the expected cash payment as well as the residual value itself in the lease receivable

improvements made to leased property by lessee

recorded in asset accounts descriptive of nature -excludes moveable assets

initial direct costs are incurred by the lessor

sales-type w/ profit: costs expensed in period of sale (beginning of lease) Sales-type w/o profit & operating lease: costs are deferred and expensed over the lease term

uncertainty of lease payments

sometimes lease payments are scheduled to increase or decrease whether a specified event occurs

residual value

the estimate of the asset's commercial value at the end of the lease term

Under a short-term lease, short-cut method:

the lessee can chose to not recognize a right-of-use asset and record payments as a "lease expense" instead

separately

the lessee in a finance lease, will report interest expense and amortization expense ___ in the income statement

income statement

the lessee in an operating lease combines its interest expense and amortization expenses together into a single lease expense on the ___ ___.

beginning

the lessor in an finance lease will report interest revenue over the lease tern according to effective interest method and will record selling profit at ____ of the lease if fair value of the asset exceeds its cost

straight-line

the lessor in an operating lease reports a single lease revenue, the ___-___ amount, each year on their income statement

selling profit

when the fair value of the asset (usually the present value of the lease payments, or "selling price") exceeds the cost or carrying value =sales revenue - COGS

Finance/Sales-type Lease Criteria

1. The agreement specifies that ownership of the asset transfers to the lessee. 2. The agreement contains a purchase option that the lessee is *reasonably certain* to exercise (bargain purchase option). 3. The lease term is for the "major part" (75%) of the remaining economic life of the underlying asset. 4. The present value of the lease payments equals or exceeds "substantially all" (90%)of the fair value of the underlying asset. 5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.

expensed

Nonlease components that are included in periodic lease payments to be paid by the lessor In effect, indirectly paid by the lessee—and ___ by the lessee

issuance

Only the journal entry at the ____ of the lease is affected by whether a sales-type lease has selling profit from both the lessor and lessee.

terminate

the termination penalty to be considered an additional cash payment if the lessee is "reasonably certain" to ___ the lease -lease term to last until expected termination date