11 6 Lessee Ltd Case as of 3
CASE 11-6: LESSEE LTD
Caleb Aytes
Brayden Hudson
Brian Laws
Katie Vittetoe
Topics To Be Discussed
•
•
•
•
Relevant Facts of the Case
IFRS
US GAAP
Real World
Relevant Facts of the Case
• Lessee Ltd.
– British Company that applies IFRS
– Leases equipment from Lessor Inc.
– 3 years
– No purchase or renewal options & equipment reverts back to Lessor when lease expires
– Remaining useful life = 4 years
– Guaranteed Residual Value of $20K
Accountants Analysis
Relevant Questions
1. Was the junior accountant’s analysis correct?
Why or why not?
2. Was the senior accountant’s analysis correct?
Why or why not?
3. How would the answer differ under U.S.
GAAP?
IFRS Analysis
• IAS 17 – Financing and Operating Leases
• Finance Lease - A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership.
• Operating Lease – lease that does not transfer substantially all the risks and rewards incidental to ownership. IFRS Finance Lease Guidance
•
Substance rather than form
•
•
IAS 17 Examples Given:
•
•
•
•
Ownership transfer to lessee after lease contract
Bargain Purchase Option Available
Lease terms major part of assets life (whether title transferred or not)
– Terms of Lessee’s Leased Asset – 75% or 3 of the 4 years of useful life
P.V of the Min. Lease Payment’s are substantially that of the F.V. of the asset at lease inception
– P.V. of MLP - $263,711.50
Leased asset is specialized for lessee’s business use without significant modification
Controllers Assessment:
•
Junior Accountant – Incorrectly stated as an Operating since title reverts back to owner
•
Senior Accountant – Correctly stated as a financing lease
Financing Lease Recognition – Lessee
•
Interest Rate
–
–
•
implicit rate of lessor unless undeterminable then use lessee’s incremental borrowing rate
10% Implicit Rate of the Lease Terms
P.V. of Min. Lease Payments
–
–
Payments made over lease term excluding services, taxes to be reimbursed by
Caleb Aytes
Brayden Hudson
Brian Laws
Katie Vittetoe
Topics To Be Discussed
•
•
•
•
Relevant Facts of the Case
IFRS
US GAAP
Real World
Relevant Facts of the Case
• Lessee Ltd.
– British Company that applies IFRS
– Leases equipment from Lessor Inc.
– 3 years
– No purchase or renewal options & equipment reverts back to Lessor when lease expires
– Remaining useful life = 4 years
– Guaranteed Residual Value of $20K
Accountants Analysis
Relevant Questions
1. Was the junior accountant’s analysis correct?
Why or why not?
2. Was the senior accountant’s analysis correct?
Why or why not?
3. How would the answer differ under U.S.
GAAP?
IFRS Analysis
• IAS 17 – Financing and Operating Leases
• Finance Lease - A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership.
• Operating Lease – lease that does not transfer substantially all the risks and rewards incidental to ownership. IFRS Finance Lease Guidance
•
Substance rather than form
•
•
IAS 17 Examples Given:
•
•
•
•
Ownership transfer to lessee after lease contract
Bargain Purchase Option Available
Lease terms major part of assets life (whether title transferred or not)
– Terms of Lessee’s Leased Asset – 75% or 3 of the 4 years of useful life
P.V of the Min. Lease Payment’s are substantially that of the F.V. of the asset at lease inception
– P.V. of MLP - $263,711.50
Leased asset is specialized for lessee’s business use without significant modification
Controllers Assessment:
•
Junior Accountant – Incorrectly stated as an Operating since title reverts back to owner
•
Senior Accountant – Correctly stated as a financing lease
Financing Lease Recognition – Lessee
•
Interest Rate
–
–
•
implicit rate of lessor unless undeterminable then use lessee’s incremental borrowing rate
10% Implicit Rate of the Lease Terms
P.V. of Min. Lease Payments
–
–
Payments made over lease term excluding services, taxes to be reimbursed by
Cited: • • • Board, F. A. (2013, May 2013). Proposed Accounting Standards Update-Leases (Topic 842). Retrieved March 23, 2015, from FASB: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176162613656&acceptedDisclaimer=true Foundation, F. A. (2015). FASB Codification. Retrieved March 23, 2015, from Checkpoint: https://checkpoint-riag-com.ezproxy.uta.edu/app/main/tocFrame?usid=e7893k1f253d&baseTid=T0GAAPCOD%3A840-10& feature=ttoc&lastCpReqId=5208672&state=U0FE2-k_9_&usedParms=clickedTid Kaikati, Jack. "Synthetic Leases: Red Flags in Retailing." International Journal of Retail and Distribution 32.10 (2004): 47581. Print.