Chp 20 notes 10th
LEASES
Lessee:
Operating lease or finance lease (substance over legal form). ASPE: ‘Capital’
Finance lease if meet one of the criteria (for both ASPE and IFRS): transfer of ownership/BPO, lease term major part of economic life (> 75%), PV minimum lease payments (MLP) substantially all of FV (> 90%). If not, operating lease and record rent expense and disclose if committed more than one year.
IFRS: additional criteria: leased asset specialized – only lessee can use without major modifications. (p. 1274)
PV of minimum lease payments include the rental payments (PMT) (less any executory costs), n = # payments, i = implicit rate, if known (ASPE: lower of incremental rate or implicit rate, if known), FV = BPO, residual value guaranteed by the lessee, or penalty, otherwise FV = 0.
Finance lease: DR Leased Asset at the lower of PV of the minimum lease payments (MLP) or FMV CR Lease liability
Note: If PV of MLP is > FMV, must determine the interest rate and use that interest rate to calculate interest expense. PMT less any executory costs, n = # payments, PV = selling price/fair value, FV = BPO, residual value guaranteed by the lessee, or penalty, otherwise FV = 0. CPT i = ??
Depreciate asset as if owned. If a criterion 1 is met (transfer/BPO), use useful life and subtract any salvage value at the end of useful life. If not, only subtract guaranteed residual and depreciate over the lease term. Use effective interest method to record interest expense and use the implicit rate if known (ASPE: lower of the incremental rate or implicit rate if known)
Lessor:
Determines the payments. PV = FMV, n = # payments, i = implicit rate, FV = BPO or any residual value, otherwise FV = 0. PMT = ?
Operating or finance lease?
Financing type (Direct) lease if selling price = cost. See page 1293 for terms
Journal entries:
DR Lease Receivable = undiscounted PMTs + FV CR Asset = selling price (fair value) CR Unearned Interest income (gross lease receivable –
Lessee:
Operating lease or finance lease (substance over legal form). ASPE: ‘Capital’
Finance lease if meet one of the criteria (for both ASPE and IFRS): transfer of ownership/BPO, lease term major part of economic life (> 75%), PV minimum lease payments (MLP) substantially all of FV (> 90%). If not, operating lease and record rent expense and disclose if committed more than one year.
IFRS: additional criteria: leased asset specialized – only lessee can use without major modifications. (p. 1274)
PV of minimum lease payments include the rental payments (PMT) (less any executory costs), n = # payments, i = implicit rate, if known (ASPE: lower of incremental rate or implicit rate, if known), FV = BPO, residual value guaranteed by the lessee, or penalty, otherwise FV = 0.
Finance lease: DR Leased Asset at the lower of PV of the minimum lease payments (MLP) or FMV CR Lease liability
Note: If PV of MLP is > FMV, must determine the interest rate and use that interest rate to calculate interest expense. PMT less any executory costs, n = # payments, PV = selling price/fair value, FV = BPO, residual value guaranteed by the lessee, or penalty, otherwise FV = 0. CPT i = ??
Depreciate asset as if owned. If a criterion 1 is met (transfer/BPO), use useful life and subtract any salvage value at the end of useful life. If not, only subtract guaranteed residual and depreciate over the lease term. Use effective interest method to record interest expense and use the implicit rate if known (ASPE: lower of the incremental rate or implicit rate if known)
Lessor:
Determines the payments. PV = FMV, n = # payments, i = implicit rate, FV = BPO or any residual value, otherwise FV = 0. PMT = ?
Operating or finance lease?
Financing type (Direct) lease if selling price = cost. See page 1293 for terms
Journal entries:
DR Lease Receivable = undiscounted PMTs + FV CR Asset = selling price (fair value) CR Unearned Interest income (gross lease receivable –