ACC CH 10

How are finance leases recorded on balance sheet?

Finance lease assets are typically included in PPE, and lease liabilities are included with debt.

What are finance leases?

Finance leases transfer control of the lease asset to the lessee. Finance leases are effectively like purchasing the asset and financing the purchase with a collateralized loan.

What is the first step in lease accounting?

First step is to determine whether a lease is operating or financing. If the lease is similar to the purchase of an asset, the company must classify the lease as financing. Finance leases meet one or more of the following criteria. 1. Transfer of ownership 2. Purchase option 3. Lease term 4. Present value 5. Specialized asset Any lease of 12 months or more not classified as a finance lease is classified as an operating lease.

What is a lease liability and right of use asset?

1. A lease liability is recognized at the present value of the remaining lease payments. 2. A right of use asset is recognized at an amount calculated as follows: The balance sheet presents lease liabilities and right of use assets separately (not the net amount). The amount reported on the balance sheet for the lease obligation and right of use lease asset relates to the payments that the company will make under the lease terms. Footnotes also disclose a schedule of such lease payments for both operating and finance leases.

What are the two transition options to adopt the new standard?

1. Retroactive adoption: implement the new standard in the current year and restate all prior periods presented on the financial statements. 2. Prospective adoption: implement the new standard without restatement of the prior periods.

What is a lease?

A lease is a contract between the owner of an asset (The lessor) and the party desiring to use that asset (The lessee). Since this is a private arrangement between two willing parties, it is governed by only applicable commercial law and can include whatever provisions the parties negotiate.

Explain lease accounting and the balance sheet.

Both operating and finance leases are recognized on the balance sheet.

How are operating leases recorded on balance sheet?

Operating lease assets and liabilities are each reported in a separate line items if material.

What are operating leases?

Operating leases transfer control of the use of the lease asset, but not the asset itself. Any lease of 12 months or more not classified as a finance lease is classified as an operating lease.

Example FASB issued a new lease accounting standard effective for all U.S. companies in 2019.

Under the pre-2019 accounting standard, companies' balance sheets did not include the lease assets and lease liabilities if the company classified the lease as an "operating" lease. Under current GAAP, these operating lease assets and liabilities are now included on companies' balance sheets. The new standard requires companies classify all leases as either a finance lease or an operating lease.