Ch 20 accounting Leases

other indicators that might suggest a transfer of risks and rewards of ownership includes such situations like:

1. lessee absorbs the lossors' losses if the lessee cancels the lease. 2. the lessee assumes the risk associated with the amount of the residual value of the asset at the end of the lease term. 3. there is a bargain renewal option, where the lessee can renew the lease for an additional term at significantly less than then the market's rent.

Off balance sheet financing

Doesn't show up on the b/s

Capital lease

Greater than one year, called non current term.

Capital lease

Greater than one year, called non current term. The benefits and risks are transferred, then should be capitalized. must meet criteria, like above and the use of the assets services inherent in the leased asset, the recovery by the lessor of all of its investment in the leased asset plus a return on that investment and under IFRS, some cases the level of specialization of the specific asset that no one else could utilize it.

Operating lease

Less than 1 year term is current

unearned interest income

Unearned Interest Income is a contra account to lease receivable. represents the difference between the undiscounted lease receivable and the fair value of the lease property.

IFRS criteria

any one or combination of the following situations normally indicates that risks and rewards of ownership are transferred to the lessee and supports classification as a finance lease. 1. reasonable assurance the lessee will obtain ownership of the item at end of term. 2. the lease term is for a major part of the economic life of item. 3. lease allows lessor to recover substantial or all of its investment in item and earn a return. 4. leased assets are so specialized that they are of no use only the lessee.

initial direct costs

costs in incurred by a lessor that are directly associated with negotiating and arranging a specific lease.

guaranteed residual value

from the lessee's perspective is the max amount the lessor can require the lessee to pay at the end of the lease.

direct financing leases

generally result from arrangements with lessors that are engaged mostly in financing operations, such as finance companies and banks. Their business model is to earn interest income.

Lessee

has obligations to make payments to the lessor

operating lease

if the benefits and risks are not transferred from one party to the other then it is referred to as this.

Bargain purchase option

is a provision that allows the lessee to purchase the leased asset for a price that is significantly lower than the asset's expected fair market value, typically questions will state value of $1.

bargain renewal option

is a provision that allows the lessee to renew the lease for a rental amount that is lower than the expected fair rental at the date when the option becomes exercisable.

Residual value

is the asset's estimated fair value at the end of the lease term.

Interest rate implicit

is the lease's internal rate of return that makes the present value of the min lease payments plus any unguaranteed residual values equal to the fair value of the leased asset. IFRS requires us to use this!!

unguaranteed residual value

is the portion of the residual value that is not guaranteed by the lessee or is guaranteed solely by the party that is related to the lessor. Often no part of the residual is guaranteed.

gross investment in lease

lease receivable, for the lessor. Take the annual lease amount and multiply by number of years then add bargain purchase option( and or the guaranteed residual) if any to get total min lease payments then add the unguaranteed residual for the final amount of this type of investment.

executory costs

leased property needs to be insured and maintained and even may have property tax, these ownership type expenses are called this

sales type lease

manufacturer or dealer lease, includes the rental amount the recovery of the dealer's profit.

Rental payments

may the be same amount year to year, or may increase or decrease. May be predetermined or may vary with sales, prime interest rate, consumer price index or some other factor.

net investment in lease

net of the 2 accounts above. And the present value of min lease payments plus the unguaranteed residual.

Lessor

owns the leased asset, receives cash payments as rents

effective interest rate

r=(1+i/n)^n-1

executory contract

requires continuing performance by both parties, argument exists these shouldn't be capitalize b/c other types of these contracts are not, such as employment contracts and purchase commitments.

classification approach

says transactions should be classified and accounted for according to their economic substance. are similar to installment purchases. lessees make rental payments whereas asset holders make mortgage payments.

contract based approach

the leased asset that is acquired is not the physical property rather its a contractual right to use the property. Also called right of use approach.

Min lease payments

the payments the lessee is making or can be required to make under the lease agreement, excluding contingent rent and executory costs.