· 1 CORPORATE FINANCIAL REPORTING 2 16 - Dilutive Securities & E.P.S Dilutive Securities and EPS.
· 1 CORPORATE FINANCIAL REPORTING 21 - Financial Reporting Of Leases Dilutive Securities and EPS.
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Transcript of · 1 CORPORATE FINANCIAL REPORTING 21 - Financial Reporting Of Leases Dilutive Securities and EPS.
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CORPORATE FINANCIAL REPORTING
21 - Financial Reporting Of Leases
Dilutive Securities and EPS
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SIMPLE LEASE EXAMPLE
Equipment costs $30,000 new, LESSEE leases the equipment for 3 years, payments at the beginning of each year. Lessee expects a residual value of $10,000 at the end of the 3 years and wants to earn 10%/year on the unpaid balance. The equipment has a 7 year life. 1/2/12 1/2/13 1/2/14 12/31/14
| | | | $30,000 $10,000
HOW MUCH ARE THE ANNUAL LEASE PAYMENTS?
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SIMPLE LEASE EXAMPLE
Suppose you “believed” the equipment was not your asset so you did not record the asset or liability – in financial reporting terminology you would be saying the lease was an “operating lease.”
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SIMPLE LEASE EXAMPLEif it is an Operating Lease
1/2/12 1/2/13 1/2/14 12/31/14 | | | |
$8,220 $8,220 $8,220
How should you record the lease payments?
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SIMPLE LEASE EXAMPLEif it is a capital Lease
Now, suppose you believed the equipment was your asset – in reporting terminology you would be saying the lease were a “capital (or finance/financing) lease.”
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SIMPLE LEASE EXAMPLEif it is a capital Lease
1/2/12 1/2/13 1/2/14 12/31/14 | | | |
$ 30,000 $10,000
At 1/2/12: (Assume for now, the residual value was not guaranteed by the lessee.)
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SIMPLE LEASE EXAMPLEif it is a capital Lease
Lessee is making 3 payments of $8,220 - a total of $24,660; but the liability is recorded at $22,486
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SIMPLE LEASE EXAMPLEif it is a capital Lease
1/2/12 1/2/13 1/2/14 12/31/14 | | | |
$ 30,000 10,000
At 1/2/12 - 1/2/14 :
Liabilities 9
LEASES – WHICH IS IT?(OR HOW TO AVOID CAPITAL LEASES)
Can the lessee cancel the lease? yes no Does title transfer at the lease end? yes BOO !
no CAPITAL Is there a bargain purchase option? yes LEASE
no Is the lease for ≥ ¾ of the asset’s useful life? yes
no Is the PVMLP ≥ 90% assets fair value? yes
no HURRAY !
OPERATING LEASE
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LEASESINTERNATIONAL VIEW
IAS 17 is similar to FAS 13, but is more “principles” based – it gives situations that individually or in combination would lead you to classify a lease as a finance lease. The idea is that a finance lease transfers substantially all the risks and rewards of ownership to the lessee.
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LEASESAdditional Considerations
Residual value - unguaranteed or guaranteed
Executory costs treatment
Lessee’s interest rate -incremental borrowing rate
unless…
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LEASESAdditional Considerations
Lessor Accounting
Lessor’s Initial Direct Costs (IDC): 1-incremental direct costs (paid to 3rd
parties) & 2-internal direct costs
(internal indirect costs – are not IDC and are expensed immediately)
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LEASESAdditional Considerations
Real Estate
Sale and Leaseback
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SALE AND LEASEBACK(Appendix 21 A)
Fairly Common Transactions (or pair of transactions)
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SALE AND LEASEBACK
Seller / lessee’s accountant looks at it as two (related) transactions.
Transaction 1 – the sale – like the sale of PPE in ACCT 3220, but with a difference: gains/losses are not recorded immediately.*
Transaction 2 – the leaseback – treated as either an operating or capital lease.
* There are two exceptions to this general rule.
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LEASES – WHAT YOU SHOULD DO WHEN READING FINANCIAL STATEMENTS:
IAS and American standards differ in detail, but both give
you a method to “undo” management maneuvers to
avoid capital leases.
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THE LEASE:LESSOR ACCOUNTING
LESSEE: LESSOR:
Operating lease Operating lease Sales type lease Capital lease or
Direct financing lease
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THE LEASE:LESSOR ACCOUNTING
In general, if it is a capital lease for the lessee, then the lessor considers the asset to be sold, but not always.
To be considered “sold” the lessor has two additional criteria that must be met:
Lessor is “certain” of payment and Lessor has no material uncertain costs.