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CHAPTER 15
LEASES
Learning Objectives
1. Overview : Lease.
2. Types of Leases
3. Lease Agreements
4. Classification criteria in order to distinguish
between the types of leases
5. Accounting for types of leases:
1. Both lessee and lessor
6. Disclosure & Presentation
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Economic Advantages to Leasing
1. No down payment.
2. Avoid risks of ownership.
3. Flexibility.
4. Protection against obsolescence
5. use of an asset without showing the
resources/sources.. Off-balance-sheet
financing
6. …….
3
Accounting by the Lessor/Lessee
Classification of leases>>> 4
Accounting for Leases and
classifications: FASB 13
• Fundamental Rights and Responsibilities
• Recognize the true Substance over the Form of the
lease
The issue of how to report leases is the case of substance versus
form. Although technically legal title may not pass, the benefits
from the use of the property do.
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CLASSIFICATION OF LEASE
LEASES
LESSEE LESSOR
transfers rental
ownership agreements DIRECT SALES
FINANCING TYPE
Classification Criteria:…>
6
CLASSIFICATION OF LEASE
LEASES
PART I PART II
LESSEE LESSOR
CAPITAL OPERATING
LEASE LEASE
transfers rental
ownership agreements
Classification Criteria:…>
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1. FASB (13) CRITERIA
1. Transfer of Ownership
The lease contract includes a provision that the title to the
leased asset passes to the lessee by the end of the lease term
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CAPIALIZED AMOUNT
Lessee
• The Lessee records the lease an asset/liability:
LESSER OF:
1. FAIR VALUE of the asset at the inception
of lease or
2. PV of MLP (PVMLP)
Question: what should be included in the
PVMLP
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Residual Value (RV)
Guaranteed or Unguaranteed
• Estimated Value at the end of the lease term!
• GUARANTEED RV is additional payment at the
end of the lease term
•If Bargain Purchase Option:
–GRV becomes irrelevant
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CAPITAL Leases - Lessee
The amount recorded (capitalized) is the
PVMLP.
However, the amount recorded cannot exceed
the fair value of the leased asset.
the interest rate used by the lessee is the lower
of:
1. Its incremental borrowing rate, or
2. The implicit interest rate used by the lessor.
ACCOUNTING FOR
CAPITAL LEASE: LESSEE
LESSEE
Asset user
Asset & Liability are recognized
-Amount: PV of Lease payments
-Including any BPO or Guarantee Residual Value (GRV)
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CLASSIFICATION OF LEASE: LESSOR
LEASES
LESSEE LESSOR
DIRECT SALES
FINANCING TYPE
Classification Criteria:…>
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Accounting by the Lessor
Classification of Leases by the Lessor
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Accounting by the Lessor
Classification of Leases by the Lessor
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Initial Direct Costs
costs incurred by the lessor in
negotiating/preparing a lease agreement.
e.g. Legal fees, commissions
• Operating Leases − Capitalize and amortize
over the lease term by the lessor.
• Direct Financing Leases − not expensed ;
deferred and recognized over the lease term
• Sales type leases: expensed at the inception
of the lease (selling expense)
How should the lease be
classified by LESSOR
• Since the fair value equals the lessor’s
carrying value, there is no dealer’s profit,
making this a direct financing lease.
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Sales-Type Lease: LESSOR