Chapter21 fininanalcial accounting

8/17/2019 Chapter21 fininanalcial accounting

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PREVIEW OF CHAPTER

Intermediate Accounting

IFRS 2nd Edition

21


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5. Describe the lessor’s accounting for

direct-financing leases.

6. Identif s!ecial features of lease

arrangements that cause uni"ue

accounting !roblems.

#. Describe the effect of residual $alues%

guaranteed and unguaranteed% on lease

accounting.

&. Describe the lessor’s accounting for

sales-t!e leases.

'. (ist the disclosure re"uirements for

leases.

After studying this chapter, you should be able to:

Accounting for Leases

21LEARNING OBECTIVE!

LEARNING OBECTIVE!

1" E#$%ain t&e nature' econo(ic

su)stance' an* a*+antages of %ease

transactions"

2. Describe the accounting criteria and

!rocedures for ca!itali)ing leases b the

lessee.

*. +ontrast the o!erating and ca!itali)ation

methods of recording leases.

,. E!lain the ad$antages and economics

of leasing to lessors and identif the

classifications of leases for the lessor.


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Largest grou$ of %ease* e,ui$(ent in+o%+es-

Information technolog e"ui!ment

rans!ortation /truc0s% aircraft% rail1 +onstruction

Agriculture

A %ease is a contractual agreement beteen a lessor and a

lessee% that gi$es the %essee the right to use s!ecific !ro!ert%

oned b the %essor% for a s!ecified !eriod of time.

THE LEA!ING ENVIRON.ENT

LO 1

W&o Are t&e P%a/ers0


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3. 4rotection against obsolescence.

2. Fleibilit.

A*+antages of Leasing

LO 1



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+a!itali)e a lease that transfers substantiall all of the

benefits and ris0s of !ro!ert onershi!% !ro$ided the

lease is noncance%a)%e.

Conce$tua% Nature of a Lease

(eases that do not transfer

substantiall all the benefits

and ris0s of

onershi! are o!erating leases.

LO 1



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#. Describe the effect of residual $alues%guaranteed and unguaranteed% on lease

accounting.


sales-t!e leases.


leases.


LEARNING OBECTIVE!

LEARNING OBECTIVE!

3. E!lain the nature% economic substance%

and ad$antages of lease transactions.

2" escri)e t&e accounting criteria an*

$roce*ures for ca$ita%i3ing %eases )/t&e %essee"

*. +ontrast the o!erating and ca!itali)ationmethods of recording leases.





21


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If the lessee ca$ita%i3es a lease% the lessee records an assetand a liabilit generall e"ual to the !resent $alue of the rental

!aments.

Records de!reciation on the leased asset.

reats the lease !aments as consisting of interest and

!rinci!al.

ACCO4NTING B5 THE LE!!EE

LO 2

ILL4!TRATION 212

ournal Entries for +a!itali)ed (ease


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For a finance %ease% the IAS has identified four criteria.

3. (ease transfers o6ners&i$ of the !ro!ert to the lessee.

2. (ease contains a 777777777777777777777777777777777.

*. (ease term is for (a7or $art of the economic life of the

asset.

One or (ore

must be met

for finance

%ease

accounting.

,. 7777777777777777777777 of the

minimum lease !amentsamounts to su)stantia%%/ a%% of

the fair $alue of the leased asset.


LO 2


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Lease Agree(ent (eases that O NOT (eet an/ oft&e four criteria are accounted for

as

777777777777777777777777777.

LO 2


ILL4!TRATION 218

Diagram of (essee’s +riteria for (ease +lassification


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Ca$ita%i3ation Criteria

Transfer of O6ners&i$ Test

If the lease transfers onershi! of the asset to the lessee%

it is a finance lease.

BargainPurc&ase O$tion Test

At the ince!tion of the lease% the difference beteen the

o!tion !rice and the e!ected fair mar0et $alue must be

large enough to ma0e eercise of the o!tion reasonabl

assured.

LO 2



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Econo(ic Life Test

Lease ter( is generall considered to be the fied% non-

cancelable term of the lease.

Bargainrene6a% o$tion can etend this !eriod.

At the ince!tion of the lease% the difference beteen the

reneal rental and the e!ected fair rental must begreat enough to ma0e eercise of the o!tion to rene

reasonabl assured.


LO 2



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I%%ustration- Carrefour /FRA1 leases Leno+o /+891 4+sfor to ears at a rental of :3;; !er month !er com!uter

and subse"uentl can lease them for :3; !er month !er

com!uter for another to ears. he lease clearl offers a

bargain-reneal o!tion< the lease term is considered to be

four ears.


LO 2


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Reco+er/ of In+est(ent Test

Minimum Lease Payments:

=inimum rental !aments >uaranteed residual $alue

4enalt for failure to rene or etend the lease

argain-!urchase o!tion

Executory osts: Insurance

=aintenance

aes

Eclude from 4? of

=inimum (ease

4ament +alculation



LO 2


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Reco+er/ of In+est(ent Test

!iscount "ate



(essee com!utes the !resent $alue of the minimum lease

!aments using the i($%icit interest rate.

In the e$ent it is im!racticable to determine the im!licit

rate% the lessee should use its

7777incrementlal777777777777 )orro6ing rate.

LO 2


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Asset an* Lia)i%it/ Recor*e* at the loer of@

3. !resent $alue of the minimum lease !aments

/ecluding eecutor costs1 or

2. fair mar0et $alue of the leased asset at the ince!tion

of the lease.

Asset an* Lia)i%it/ Accounte* for ifferent%/


LO 2


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e$reciation Perio*

If lease transfers o6ners&i$% de!reciate asset o$er

the econo(ic %ife of the asset.

If lease *oes not transfer o6ners&i$% de!reciate

o$er the ter( of t&e %ease.



LO 2


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Effecti+eInterest .et&o*

sed to allocate each lease !ament beteen !rinci!al

and interest.

e$reciation Conce$t

De!reciation and the discharge of the obligation are

inde!endent accounting !rocesses.



LO 2


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I%%ustration- +98 +a!ital /9(D1 /a subsidiar of +98 >lobal1 and I$anhoe =ines

(td. /+A91 sign a lease agreement dated anuar 3% 2;35% that calls for +98 to

lease a front-end loader to I$anhoe beginning anuar 3% 2;35. he terms and

!ro$isions of the lease agreement and other !ertinent data are as follos.

• he term of the lease is fi$e ears. he lease agreement is non-cancelable%re"uiring e"ual rental !aments of B25%'&3.62 at the beginning of each ear

/annuit-due basis1.• he loader has a fair $alue at the ince!tion of the lease of B3;;%;;;% an

estimated economic life of fi$e ears% and no residual $alue.

• I$anhoe !as all of the eecutor costs directl to third !arties ece!t for the!ro!ert taes of B2%;;; !er ear% hich is included as !art of its annual

!aments to +98.

• he lease contains no reneal o!tions. he loader re$erts to +98 at thetermination of the lease.

• I$anhoe’s incremental borroing rate is 33 !ercent !er ear.

• I$anhoe de!reciates similar e"ui!ment that it ons on a straight-line basis.

• +98 sets the annual rental to earn a rate of return on its in$estment of 3;!ercent !er ear< I$anhoe 0nos this fact.


LO 2


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Chat t!e of lease is this E!lain.

Ca$ita%i3ation Criteria-

3. ransfer of onershi!

2. argain !urchase o!tion

*. (ease term for maor !art

of economic life of

leased !ro!ert

,. 4resent $alue ofminimum lease !aments

substantiall all of F=? of

!ro!ert

NO

NO

Finance Lease' 9:


(ease term 5 rs.

Economic life 5 rs.

4? B3;;%;;;

F=? B3;;%;;;.5E!

5E!

LO 2


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4ament B 25%'&3.62

4ro!ert taes /eecutor cost1 - 2%;;;.;;

=inimum lease !ament 2*%'&3.62

4resent $alue factor /i3;G%n51 ,.36'&6

4? of minimum lease !aments ;1


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(eased E"ui!ment 3;;%;;;.;;

(ease (iabilit 3;;%;;;.;;

I$anhoe records the finance lease on its boo0s on anuar 3% 2;35%as@

4ro!ert a E!ense 2%;;;.;;(ease (iabilit 2*%'&3.62

+ash 25%'&3.62

I$anhoe records the first %ease $a/(ent on anuar/ 1' 2% as

follos.


LO 2


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ILLUSTRATION 21-6

Lease AmortizationSchedule for Lessee—

Annuity-Due Basis


LO 2


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I$anhoe records accrued interest on December *3% 2;3,Interest E!ense #%6;3.&,

Interest 4aable #%6;3.&,

4re!are the entr to record accrued interest at December *3% 2;35.

LO 2

ACCO4NTING B5 THE LE!!EE ILL4!TRATION 21?(ease Amorti)ation

Schedule for (esseeH

Annuit-Due asis


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De!reciation E!ense 2;%;;;

Accumulated De!reciationH(eased E"ui!ment 2;%;;;

4re!are the re"uired on December *3% 2;35% to record de!reciationfor the ear using the straight-line method /B3;;%;;; 5 ears1.

he liabilities section as it relates to lease transactions at

December *3% 2;35.


ILL4!TRATION 21@

Re!orting +urrent and9on-+urrent (ease

(iabilities

LO 2


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ILL4!TRATION 21?(ease Amorti)ation

Schedule for (esseeH

Annuit-Due asis

4ro!ert a E!ense 2%;;;.;;

Interest 4aable #%6;3.&,

(ease (iabilit 36%*#'.#&

+ash 25%'&3.62

I$anhoerecords the

lease

!ament of

anuar 3%

2;36% as

follos.


LO 2


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O$erating .et&o* Lesseehe lessee assigns rent to the !eriods benefiting from the use

of the asset and ignores% in the accounting% an commitments to

ma0e future !aments.

I%%ustration- Assume I$anhoe accounts for the lease as an

o!erating lease. I$anhoe records the !ament on anuar 3%

2;35% as follos.

LO 2

Rent E!ense 25%'&3.62

+ash 25%'&3.62



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accounting.


sales-t!e leases.


leases.


LEARNING OBECTIVE!LEARNING OBECTIVE!





lessee.

:" Contrast t&e o$erating an*ca$ita%i3ation (et&o*s of recor*ing

%eases"





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ILL4!TRATION 21

+om!arison of +harges

to J!erationsH+a!ital

$s. J!erating (eases

Differences using a finance lease instead of an o!erating lease.

3. Increase in amount of re!orted debt /both short-term and long-term1.

2. Increase in amount of total assets /s!ecificall long-li$ed assets1.

*. (oer income earl in the life of the lease% therefore loer retained earnings.


LO #


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accounting.


sales-t!e leases.


leases.







lessee.


8" E#$%ain t&e a*+antages an*

econo(ics of %easing to %essors an*

i*entif/ t&e c%assifications of %eases

for t&e %essor"


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A lessor determines the amount of the rental% basing it on the rate

of returnHthe im!licit rateHneeded to ustif leasing the asset.

If a residual $alue is in$ol$ed /hether guaranteed or not1% thecom!an ould not ha$e to reco$er as much from the lease

!aments.

Econo(ics of Leasing

ACCO4NTING B5 THE LE!!OR

LO $


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a. J!erating leases.

b. Finance leases

Direct-financing leases

Sales-t!e leases

C%assification of Leases )/ t&e Lessor


LO $


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C%assification of Leases )/ t&e Lessor


ILL4!TRATION 211<

Diagram of (essor’s+riteria for (ease

+lassification

LO $


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>" escri)e t&e %essorDs accounting for

*irectfinancing %eases"





accounting.


sales-t!e leases.


leases.







lessee.






21


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In su)stance the financing of an asset !urchase b the lessee.

Lessor recor*s-

A 77777777777777777777777 instead of a leased asset.

Recei$able is the !resent $alue of the minimum lease

!aments !lus the !resent $alue of the unguaranteed

residual $alue.

irectFinancing .et&o* Lessor


LO %


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I%%ustration- sing the data from the !receding +98KI$anhoe eam!le

e illustrate the accounting treatment for a direct-financing lease. Ce

re!eat here the information rele$ant to +98 in accounting for this

lease transaction.

3. he term of the lease is fi$e ears beginning anuar 3% 2;35%

non-cancelable% and re"uires e"ual rental !aments of B25%'&3.62

at the beginning of each ear. 4aments include B2%;;; of

eecutor costs /!ro!ert taes1.

2. he e"ui!ment /front-end loader1 has a cost of B3;;%;;; to +98%

a fair $alue at the ince!tion of the lease of B3;;%;;;% an estimated

economic life of fi$e ears% and no residual $alue.

*. +98 incurred no initial direct costs in negotiating and closing the

lease transaction.


continue* LO %


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he lease meets the criteria for classification as a *irectfinancing %ease for t6o reasons@

3. the lease term e"uals the e"ui!ment’s estimated economic

life% and

2. the !resent $alue of the minimum lease !aments e"uals the

e"ui!mentLs fair $alue.

It is not a sa%est/$e %ease because there is no difference

beteen the fair $alue /B3;;%;;;1 of the loader and +98’s cost

/B3;;%;;;1.


LO %


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+98 records the lease of the asset and the resulting recei$ableon anuar 3% 2;35 /the ince!tion of the lease1% as follos.

(ease Recei$able 3;;%;;;

E"ui!ment 3;;%;;;

ILL4!TRATION 2112

+om!utation of (ease

Recei$able

+om!anies often re!ort the lease recei$able in the statement of

financial !osition as M9et in$estment in finance leases.

LO %


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ILLUSTRATION 21-13

Lease AmortizationSchedule for Lessor—

Annuity-Due Basis


LO %


40/103


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I$anhoe records accrued interest on December *3% 2;3,Interest Recei$able #%6;3.&,

Interest Re$enue #%6;3.&,

Jn December *3% 2;35% +98 recogni)es the interest re$enue earned

during the first ear through the folloing entr.

ILLUSTRATION 21-13


Annuity-Due Basis


LO %


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At December *3% 2;35% +98 re!orts the lease recei$able in itsstatement of financial !osition among current assets or non-current

assets% or both. It classifies the !ortion due ithin one ear or the

o!erating ccle% hiche$er is longer% as a current asset% and the rest

ith non-current assets.

ILL4!TRATION 2118Re!orting (ease

ransactions b (essor


LO %


43/103

21-43 LO %

I$anhoe records accrued interest on December *3% 2;3,+ash 25%'&3.62

(ease Recei$able 36%*#'.#&

Interest Recei$able #%6;3.&,

4ro!ert a E!enseK4ro!ert aes 4aable 2%;;;.;;

he folloing entr records the recei!t of the second earLs lease

!ament on anuar 3% 2;36.

ILLUSTRATION 21-13


Annuity-Due Basis



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I$anhoe records accrued interest on December *3% 2;3,Interest Recei$able 5%'6*.&6

Interest Re$enue 5%'6*.&6

he folloing entr records the recognition of interest earned on

December *3% 2;36.

ILLUSTRATION 21-13


Annuity-Due Basis


LO %


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?" I*entif/ s$ecia% features of %ease

arrange(ents t&at cause uni,ueaccounting $ro)%e(s"


accounting.


sales-t!e leases.


leases.







lessee.






21


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3. Residual $alues.

2. Sales-t!e leases /lessor1.

*. argain-!urchase o!tions.

,. Initial direct costs.

5. +urrent $ersus non-current classification.

6. Disclosure.

!PECIAL ACCO4NTING PROBLE.!

LO &


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@" escri)e t&e effect of resi*ua% +a%ues'guarantee* an* unguarantee*' on

%ease accounting"


sales-t!e leases.


leases.







lessee.






21


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.eaning of Resi*ua% Va%ue Estimated fair $alue of the

leased asset at the end of the lease term.

Guarantee* +ersus 4nguarantee* A guaranteed residual$alue is hen the lessee agrees to ma0e u! an deficienc

belo a stated amount that the lessor reali)es in residual $alue

at the end of the lease term.

Resi*ua% Va%ues


LO '


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Lease Pa/(ents (essor ma adust lease !aments

because of the increased certaint of reco$er of a guaranteed

residual $alue.

Lessee Accounting for Resi*ua% Va%ue he (ini(u(

%ease $a/(ent includes a guaranteed residual $alue but

ecludes an unguaranteed residual $alue.

Resi*ua% Va%ues


LO '


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I%%ustration- Assume the same data as in the +98KI$anhoe illustrations ece!t

that +98 esti(ates a resi*ua% +a%ue of ;>'


53/103

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+98 assumes a 3; !ercent return on in$estment /RJI1% hetherthe residual $alue is guaranteed or unguaranteed. +98 ould

com!ute the amount of the lease !aments as follos.

Lease Pa/(ents

ILLUSTRATION 21-15

Lessor’s Computation of Lease Payments

LO '


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(uaranteed "esidual )alue *Lessee Accounting+An additional lease !ament that the lessee ill !a in !ro!ert or

cash% or both% at the end of the lease term.

Lease Accounting for Resi*ua% Va%ue

ILLUSTRATION 21-16

Computation of Lessee’s Capitalized Amount—Guaranteed esidual !alue

LO '


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Guarantee* Resi*ua% Va%ue Lessee

ILL4!TRATION 211@

(ease Amorti)ation Schedule for

(esseeH>uaranteed Residual ?alue

LO '


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At the end of the lease term% before the lessee transfers the assetto +98% the lease asset and liabilit accounts ha$e the folloing

balances.

Assume that I$anhoe de!reciated the leased asset don to its

residual $alue of B5%;;; but that the fair mar0et $alue of the

residual $alue at December *3% 2;3'% as B*%;;;. I$anhoe ould

ma0e the folloing ournal entr.


ILLUSTRATION 21-18

Account Balances on Lessee’s Boo"s at #ndof Lease $erm—Guaranteed esidual !alue

LO '


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(oss on Dis!osal of E"ui!ment 2%;;;.;;

Interest E!ense /or Interest 4aable1 ,5,.#6

(ease (iabilit ,%5,5.2,

Accumulated De!reciationH(eased E"ui!ment '5%;;;.;;

(eased E"ui!ment 3;;%;;;.;;

+ash 2%;;;.;;

ILL4!TRATION 211


LO '


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Assume the same facts as those abo$e ece!t that the B5%;;;

residual $alue is unguarantee* instead of guaranteed. +98 ill

reco$er the same amount through lease rentalsHthat is%

B'6%&'5.,;. I$anhoe ould ca!itali)e the amount as follos@

nguaranteed "esidual )alue *Lessee Accounting+

Lease Accounting for Resi*ua% Va%ue

ILLUSTRATION 21-19

Computation of Lessee’s Capitalized

Amount—%n&uaranteed esidual !alue LO '


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Unguaranteed Residua !aue "Lessee#

ILL4!TRATION 212<

(ease Amorti)ation Schedule for (essee

Hnguaranteed Residual ?alue

LO '


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At the end of the lease term% before I$anhoe transfers the asset to+98% the lease asset and liabilit accounts ha$e the folloing

balances.

4nguarantee* Resi*ua% Va%ue Lessee

ILL4!TRATION 2121

Account alances on (essee’s oo0sat End of (ease ermH

nguaranteed Residual ?alue

LO '


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Lessee Entries In+o%+ing Resi*ua% Va%ues

ILL4!TRATION 2122

+om!arati$e Entries for >uaranteed and nguaranteed Residual ?alues% (essee +om!an LO '


62/103

21-62 LO '

I%%ustration- Assume a direct-financing lease ith a residual $alue

/either guaranteed or unguaranteed1 of B5%;;;. +98 determines the

!aments as follos.

Lessor Accounting for Resi*ua% Va%uehe lessor or0s on the assum!tion that it ill reali)e t&e resi*ua%

+a%ue at t&e en* of t&e %ease ter( 6&et&er guarantee* or

unguarantee*.

ILL4!TRATION 212:



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Lessor Accounting for Resi*ua% Va%ue

ILL4!TRATION 2128

(ease Amorti)ation Schedule% for (essorH

>uaranteed or nguaranteed Residual ?alue

LO '


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21-64 LO '


I%%ustration 2128

+98 ould

ma0e the

folloing

entr for this

direct-

financing

lease on

3K3K35.

(ease Recei$able 3;;%;;;.;;

E"ui!ment 3;;%;;;.;;

i f i* % %


65/103

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I%%ustration 2128

+98 ould

ma0e the

folloing

entr for this

direct-

financing

lease on

3K3K35.

+ash 25%2*#.;'

(ease Recei$able 2*%2*#.;'

4ro!ert a E!enseK4ro!ert aes 4aable 2%;;;.;;

LO '


66/103


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accounting.

" escri)e t&e %essorDs accounting for

sa%est/$e %eases"


leases.







lessee.






21



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4rimar difference beteen a direct-financing lease and

a sa%est/$e %ease is the manufacturer’s or dealer’s

gross !rofit /or loss1.

(essor records the sale !rice of the asset% the cost of

goods sold and related in$entor reduction% and the

lease recei$able.

here is a difference in accounting for guaranteed andunguaranteed residual $alues.

!a%esT/$e Leases Lessor


LO -

! % T L L


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ILL4!TRATION 212?


irectFinancing +ersus !a%esT/$e Leases

LO -

! % T L L


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LEA!E RECEIVABLE /also referred to as NET INVE!T.ENT1. he

!resent $alue of the minimum lease !aments !lus the !resent $alue of

an unguaranteed residual $alue. he lease recei$able therefore includesthe !resent $alue of the residual $alue% hether guaranteed or not.

!ALE! PRICE OF THE A!!ET" he !resent $alue of the minimum lease

!aments.

CO!T OF GOO! !OL" he cost of the asset to the lessor% less the

!resent $alue of an unguaranteed residual $alue.

LO -


! % T L L


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I%%ustration- o illustrate a sales-t!e lease ith a guaranteed

/left hand side1 residual $alue and ith an unguaranteed /right

hand side1 residual $alue% assume the same facts as in the

!receding direct-financing lease situation. he estimated residual

$alue is B5%;;; /the !resent $alue of hich is B*%3;,.6;1% and theleased e"ui!ment has an B&5%;;; cost to the dealer% +98.

Assume that the fair mar0et $alue of the residual $alue is B*%;;;

at the end of the lease term.


LO -

! % T L L


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Co($utation of Lease A(ounts )/ CNH

Financia%!a%esT/$e LeaseILL4!TRATION 212@


LO -

Co($arati+e

! % T L L


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Entries

I%%ustration 212




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(essee must increase the !resent $alue of the minimum

lease !aments b the $resent +a%ue of t&e o$tion.

Jnl difference beteen the accounting treatment for a

bargain-!urchase o!tion and a guaranteed residual $alue

of identical amounts is in the co($utation of t&e

annua% *e$reciation.

Bargain Purc&ase O$tion Lessee


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Accounting for initia% *irect costs-

O$erating %eases% the lessor should defer initial direct

costs. !a%est/$e %eases% the lessor e!enses the initial direct

costs.

irectfinancing %ease% the lessor adds initial direct

costs to the net in$estment.

Initia% irect Costs Lessor


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oth the annuit-due and the ordinar-annuit situations re!ort

the reduction of !rinci!al for the net !eriod as a current

liabilitKcurrent asset.

Current +s Noncurrent


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Current +ersus Noncurrent ILL4!TRATION 21 2


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he current !ortion of the lease liabilit K recei$able as of December

*3% 2;35% ould be

Current +ersus Noncurrent

B3&%;3#.#;.

ILL4!TRATION 212

(ease Amorti)ation

ScheduleHJrdinar-

Annuit asis

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accounting.


sales-t!e leases.

" List t&e *isc%osure re,uire(ents for

%eases"







lessee.






21



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For %essees-

A general descri!tion of material leasing arrangements.

A reconciliation beteen the total of future minimum lease!aments at the end of the re!orting !eriod and their !resent

$alue.

he total of future minimum lease !aments at the end of the

re!orting !eriod% and their !resent $alue for !eriods /31 not laterthan one ear% /21 later than one ear and not later than fi$e

ears% and /*1 later than fi$e ears.

isc%osing Lease ata


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For %essors-

A general descri!tion of material leasing arrangements.

A reconciliation beteen the gross in$estment in the lease at theend of the re!orting !eriod% and the !resent $alue of minimum

lease !aments recei$able at the end of the re!orting !eriod.

nearned finance income.

he gross in$estment in the lease and the !resent $alue of

minimum lease !aments recei$able at the end of the re!orting

!eriod for !eriods /31 not later than one ear% /21 later than one

ear and not later than fi$e ears% and /*1 later than fi$e ears.

isc%osing Lease ata


LO .

4nreso%+e* Lease Accounting Pro)%e(s


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o a$oid leased asset ca!itali)ation% com!anies design% rite%

and inter!ret lease agreements to !re$ent satisfing an of the

four finance lease criteria.

he real challenge lies in dis"ualifing the lease as a finance

lease to the lessee% hile ha$ing the same lease "ualif as afinance /sales or financing1 lease to the lessor.

nli0e lessees% lessors tr to a$oid ha$ing lease arrangements

classified as o!erating leases.

4nreso%+e* Lease Accounting Pro)%e(s

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GLOBAL ACCO4NTING IN!IGHT!


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LEA!E ACCO4NTING(easing is a global business. (essors and lessees enter into arrangements

ith one another ithout regard to national boundaries. Although .S. >AA4

and IFRS for leasing are similar% both the FAS and the IAS ha$e decided

that the eisting accounting does not !ro$ide the most useful% trans!arent% and

com!lete information about leasing transactions that should be !ro$ided in the

financial statements.


After 82 = readings



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Re%e+ant FactsFolloing are the 0e similarities and differences beteen .S. >AA4 and

IFRS related to accounting for leases.

!i(i%arities

• oth .S. >AA4 and IFRS share the same obecti$e of recording leases blessees and lessors according to their economic substance% that is%

according to the definitions of assets and liabilities.

• =uch of the terminolog for lease accounting in .S. >AA4 and IFRS is the

same.

• nder .S. >AA4 and IFRS% lessees and lessors use the same general

lease ca!itali)ation criteria to determine if the ris0s and reards of

onershi! ha$e been transferred in the lease.




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Re%e+ant Factsifferences

• Jne difference in lease terminolog is that finance leases are referred to as

ca!ital leases in .S. >AA4.

• .S. >AA4 for leases uses bright-line criteria to determine if a leasearrangement transfers the ris0s and reards of onershi!< IFRS is more

general in its !ro$isions.

• .S. >AA4 has additional lessor criteria@ !aments are collectible% and

there are no additional costs associated ith a lease.

• .S. >AA4 re"uires use of the incremental rate unless the im!licit rate is

0non b the lessee and the im!licit rate is loer than the incremental rate.

IFRS re"uires that lessees use the im!licit rate to record a lease unless it is

im!ractical to determine the lessor’s im!licit rate.




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Re%e+ant Factsifferences

• nder .S. >AA4% etensi$e disclosure of future non-cancelable lease

!aments is re"uired for each of the net fi$e ears and the ears

thereafter. IFRS does not re"uire it although some com!anies !ro$ide aear-b-ear brea0out of !aments due in ears 3 through 5.

• he FAS standard for leases /SFAS 9o. 3*1 has been the subect of more

than *; inter!retations since its issuance. he IFRS leasing standard is IAS

3#% first issued in 3'&2. his standard is the subect of onl three

inter!retations. Jne reason for this small number of inter!retations is that

IFRS does not s!ecificall address a number of leasing transactions that

are co$ered b .S. >AA4. Eam!les include lease agreements for natural

resources% sale-leasebac0s% real estate leases% and le$eraged leases.




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On t&e Hori3on(ease accounting is one of the areas identified in the IASKFAS

=emorandum of nderstanding. he oards ha$e issued !ro!osed rules

based on Mright of use%N hich re"uires that all leases% regardless of their

terms% be accounted for in a manner similar to ho finance leases are treated

toda. hat is% the notion of an o!erating lease ill be eliminated% hich ill

address the concerns under current rules in hich no asset or liabilit is

recorded for man o!erating leases. A final standard is e!ected in 2;35. Oou

can follo the lease !roect at the IAS ebsite /[email protected].


APPENI 21A EA.PLE! OF LEA!E ARRANGE.ENT!


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LO 1/ nderstand

and apply leaseaccounting

concepts to

0arious lease

arrangements

ILL4!TRATION 21A1

Illustrati$e (easeSituations% (essors




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ILL4!TRATION 21A2

+om!arati$e Entries for

J!erating (ease

LO 1/


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ILL4!TRATION 21A:


Finance (easeHargain-

4urchase J!tion

LO 1/



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ILL4!TRATION 21A8+om!arati$e Entries for

Finance (ease

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ILL4!TRATION 21A>


J!erating (ease

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APPENI 21B !ALELEA!EBACJ!


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21-95 LO 11 !escribe the lessees accounting for sale3leasebac4 transactions

he term sa%e%ease)ac describes a transaction in hich

the oner of the !ro!ert /seller-lessee1 sells the !ro!ert to

another and simultaneousl leases it bac0 from the ne

oner.

A*+antages-

3. Financing

2. aes




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ETER.INING A!!ET 4!Eo the etent the se%%er%essee continues to use the asset

after the sale% the sale-leasebac0 is reall a form of financing.

(essor s&ou%* not recogni3e a gain or %oss on the

transaction.

If the se%%er%essee gi+es u$ t&e rig&t to t&e use of the asset%

the transaction is in substance a sale.

Gain or %oss recognition is a!!ro!riate.

LO 11




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If the lease meets one of the four criteria for treatment as a

finance lease% the seller-lessee should

Account for the transaction as a sale and the lease as a

finance lease.

Defer an !rofit or loss it e!eriences from the sale of the

assets that are leased bac0 under a finance lease.

Amorti)e !rofit o$er the lease term .

Lessee

APPENI 21B !ALE LEA!EBACJ!

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If none of the finance lease criteria are satisfied% t&e se%%er

%essee accounts for t&e transaction as a sa%e an* t&e %ease

as an o$erating %ease.

(essee defers such !rofit or loss and amorti)es it in

!ro!ortion to the rental !aments o$er the !eriod hen it

e!ects to use the assets.

Lessee


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If the lease meets one of the lease ca!itali)ation criteria% the

!urchaser-lessor records the transaction as a !urchase and a

direct-financing lease.

If the lease does not meet the criteria% the !urchaser-lessor

records the transaction as a !urchase and an o!erating lease.

Lessor


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$a%an Airines "$AL# on 'anuary () *+(,) sells a used Boein& , ha.in& a

carryin& amount on its /oo"s of 0,),++)+++ to &iti&a%ita for 01+)+++)+++2 'AL

immediately leases the aircraft /ac" under the follo3in& conditions4

(2 $he term of the lease is (, years) non-cancela/le) and re5uires e5ual rental

payments of 0(+)61)667 at the /e&innin& of each year2

*2 $he aircraft has a fair .alue of 01+)+++)+++ on 'anuary () *+(,) and an

estimated economic life of (, years2

72 'AL pays all e8ecutory costs2

62 'AL depreciates similar aircraft that it o3ns on a strai&ht-line /asis o.er (,

years2

,2 $he annual payments assure the lessor a (* percent return2

92 'AL’s incremental /orro3in& rate is (* percent2

!ALELEA!EBACJ EA.PLE


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his lease is a finance lease to A( because the lease term is

e"ual to the estimated life of the aircraft and because the

!resent $alue of the lease !aments is e"ual to the fair $alue of

the aircraft to +iti+a!ital.

+iti+a!ital should classif this lease as a direct financing lease.


!ALELEA!EBACJ EA.PLE

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21B !ALE LEA!EBACJ!

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Chapter21 fininanalcial accounting

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