University:
California State University, Northridge
Course:
ACCT 350 | Intermediate Financial Accounting I
Academic year:

2024
Views:

439

Pages:

18
Author:

beddgell23k

ACCOUNTING FOR LEASES CHAPTER 15 LEASES Learning Objectives 1. 2. 3. 4. Overview : Lease. Types of Leases Lease Agreements 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 2 Economic Advantages to Leasing 1. 2. 3. 4. 5. No down payment. Avoid risks of ownership. Flexibility. Protection against obsolescence use of an asset without showing the resources/sources.. Off-balance-sheet financing 6. ……. 3 Accounting by the Lessor/Lessee A lease is a contractual agreement: - lessor (Owner of Property) conveys the right to use property to - lessee (User/Renter) in return for periodic cash payments - For stated period of time 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. 5 CLASSIFICATION OF LEASE LEASES LESSOR LESSEE CAPITAL LEASE OPERATING LEASE transfers ownership rental agreements OPERATING LEASE DIRECT FINANCING CAPITAL LEASE SALES TYPE Classification Criteria:…> 6 CLASSIFICATION OF LEASE LEASES PART I PART II LESSOR LESSEE CAPITAL LEASE OPERATING LEASE transfers ownership rental agreements Classification Criteria:…> 7 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 2. Bargain Purchase Option (BPO) Makes it reasonably assured that the lessee will acquire asset allows the lessee to buy the leased asset at a price significantly lower than the asset’s fair value when the option is exercisable (BARGAIN PRICE) 3. Term: 75% of economic Life – Lease term is equal to 75% or more of the economic life of the leased asset 4. Asset Value: Present value of the minimum lease payments is greater than or equal to 90% of the FMV of the leased asset on the lease signing - what is included in Lease payments8 CLASSIFICATION OF LEASE:LESSEE MUST MEET JUST ONE CRITERIA Lease Agreement Non-Cancellable Transfer of Ownership Yes No No Bargain Purchase Yes No Lease Term >= 75% Yes PV of Payments >= 90% No Yes Capital Lease Determine if the risks/rewards of ownership transferred to lessee9 O p e r a t i n g L e a s e ACCOUNTING FOR CAPITAL LEASE PURCHASE/OWNERSHIP LESSEE (books) • • • • Determine the criteria: 1. Ownership transfer 2. Bargain purchase option 3. PV of MLP (minimum lease payment) is equal to 90% of more • 4. Lease term 75% or more of estimated economic life 10 Calculation of CAPITAL LEASE LESSEE (books) • Determine the criteria: (any one…) • Lease is classified as: CAPITAL LEASE LESSEE’S BOOKS DR. ASSET: LEASE PROPERTY CR. LEASE OBLIGATION (PAYABLE) 11 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 12 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 • UNGUARANTEED: not required to make additional payment at the end of the lease term 13 Accounting by the Lessee PV OF MINIMUM LEASE PAYMENTS (PVMLP) Minimum lease payments:  PV rental payment (usually beginning of the period) Plus: PV Guaranteed residual value  (unguaranteed : NOT included in PVMLP) 14 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) Lease payments reduction in Lease Liability & Increases to interest expense (relates to liability) Asset is subsequently Depreciated * Let’s Illustrate… 16 Depreciation of Asset: Rules*: • Transfer of Ownership: Depreciate over asset life (Legal form) • Bargain purchase option: Depreciate over the asset life (legal form) • Term (75%) : Depreciate lease term (substance over form) • Asset Value (90% FV): Depreciate over lease term (substance over form) 17 Executory Costs • Ownership of the asset is responsible for Insurance, maintenance, etc Capital Lease: Lessee gets the benefit of using the asset (LESSEE’s expense) Dr. Maintenance expense (executory costs) Cr Cash • (if included in lease payment – deduct to calculate PV MLP) • If lessor makes the payment, these costs are reimbursed by lessee by recording the expense 18