Week 4 - Leases

advantages of leasing for the lessee

- complete financing - lesser bears the risk of obsolescence - business and financial flexibility - tax benefits (If a business is leasing, they can deduct more from taxes)

downside of leasing for the lessee

- lack of ownership - Overall Cost of the Asset ( the costs of the asset over the life of the lease are higher than had the lessee purchased the asset. The lease payments must compensate the lessor for the use of the asset, financing costs, and the risk of ownership.)

sales-type, direct financing, operating

Lessor step 3 criteria: - If the lessor meets any one of the five Group I criteria, the lessor classifies the lease as a ______-_______ lease. - If the lessor meets both of the Group II criteria but none of the Group I criteria, the lessor classifies the lease as a ____ ______ lease. - If the transaction does not meet either the Group I or Group II criteria, the lessor classifies the lease as an _____ lease. (exhibit 18.3)

residual value guarantee

a guarantee or assurance made to the lessor that he will receive a fixed dollar amount for the leased asset at the end of the lease. - The lessee or a third party may provide this guarantee. - If the fair value of the asset at the end of the lease is less than the residual value guarantee, the guarantor will make a payment to the lessor for the difference in the residual value guarantee and the fair value of the asset.

short term lease

a lease that has a maximum possible lease term of 12 months or less (no options to renew) AND does not contain a purchase option that the lessee is reasonably certain to exercise (extends the term beyond 12 months) - for this kind of lease, the lessee can elect to not recognize a right of use asset or lease liability - and to recognize lease payments as expense over the lease term

right of use asset

a leased asset that the lessee has the right to control

same

always assume the inception and conception date are the ______!

unguaranteed residual asset

an amount the lessor expects to derive from the leased asset at the end of the lease term. This amount is simply the lessor's expectation; the lessee or a third party does not guarantee the residual value.

commencement date

date that the lease begins and the lessee can actually go use the asset. **PART OF STEP 3**

operating

for what type of lease does the income statement get affected by being the payment amount?

residual value guarantee

A guarantee made to a lessor that the value of an underlying asset returned to the lessor at the end of a lease will be at least a specified amount.

both

Does Group I criteria apply to lessees or lessors?

lessor

For Group II, does it apply to lessee or lessor?

lessor, lessee

For Operating lease, it does _____ meet the criteria for a finance lease. Note that the fundamental rights and responsibilities of ownership are maintained by the ______ while the _____ is merely using the asset temporarily. A sale is not recorded by the lessor; the lessor records lease revenue on a straight line basis. Lesee records the right of use asset and lease payable (considered a non debt liability) at commencement based on PV of lease payments.

75, 90

For classifying the lease: The lease term is for a major part of the economic life of the asset. (number 3), the threshold for this is what percentage? years in the lease/total useful life of asset - if its less than this percent, then its a no! What is the threshold for the pv test?

x

For the 6 lease elements only #6 will be covered which is...: the amounts that are probable of being owed by the lessee under residual value guarantees (for a lessee only) x

operating, short term, finance, operating, sales type, direct financing

Lessees classify all leases as what 3 types? lessors classify all leases as what 3 types?

finance, operating

If the lease transaction meets any one of the five Group I criteria, the lessee classifies the lease as a ______ lease. If none of the Group I criteria is met, the lessee classifies the lease as an _______ lease.

annuity due

If the payment is at the beginning of the period, what PV table do u use? annuity due or oa?

oa

If the payment is due at the end of the period, what PV table do u use? annuity due or oa?

12

If there is a short term lease (_____ months or less), leesees can elect to not record lease liability and right of use asset at the beginning of the lease term

liability

Initial measurement of operating leases: The lease ______ reflects the fact that the lessee is obligated to make future lease payments whereas the leased asset, which we refer to as the _____-___________ asset, indicates that the lessee then has the right to control the leased asset.

1, 0

It is a finance or sales type lease if _____ of the Group I criteria is met. It is an operating lease if ______ of the Group I criteria is met.

accounting, lessees, lessors, inception

Step 3: Classify the lease. The lease classification determines the lease's proper accounting treatment. - _____ classify all leases as either operating leases or finance leases. OR SHORT TERM ______ classify leases as operating, sales type, or direct financing. Before examining the classification criteria, we first need to distinguish the lease _____ and commencement date.

lessor

The owner of the asset that is being leased.

lease

a contractual agreement that gives a lessee the right to use a lessor's asset as long as the lessee follows the rules of the agreement. Money is typically given to the lessor in exchange for the use of the asset. - It's sort of like a borrowing agreement. The lease contract conveys only the right to use the asset—it typically does not result in a transfer of ownership of the asset.

1, 5

To be classified as a finance vs operating lease, we will look at the Group I criteria for both lessee and lessor! - If only ______ of 5 criteria is met, then it is a finance lease. - if none of the criteria are met then its an ________ lease

operating, financing, short term

What are the THREE different types of leases for the lessee?

operating, direct financing, sales type

What are the THREE different types of leases for the lessor?

goods or services such as maintenance services or supplies

What is an example of a non lease component?

lease incentives

payments the lessor makes to the lessee to provide an incentive to enter into a lease agreement. ex: the lessor may agree to pay IT system installation charges at a new location to give the lessee incentive to lease the new facility. another ex: the lessor may agree to pay the lessee's remaining rentals on another lease so the lessee can terminate that lease.

inception date

the actual date that lease agreement is signed. **PART OF STEP 3**

residual value

the expected value of a depreciable asset at the end of its useful life; what we expect the value to be at the end of the lease term for this specific chapter

lessee

the person borrowing the asset who is making cash payments in exchange for this right