...To: | Chief Financial Officer of Lessee Inc. | From: | Annie Kight | Date: | October 4, 2014 | Re: | Leased Equipment Recommendation | Memo After reviewing the various requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 840 Leases regulations over how to properly account for the leased equipment, I have come up with recommendations of how you should classify the lease, measure the initial minimum lease payment (MLP), calculate the subsequent measurements, and derecognize the leased asset. The remainder of this memo provides my analysis and support for these conclusions. Lease Classification According to ASC 840-10-25-1, there are four criteria that should be considered before classifying it as either an operating lease or a capital lease. If the lease meets any of the four criteria below, then it is a capital lease. a) Transfer of ownership: “if the lease transfers ownership by the end of the property to the lessee by the end of the lease term,” b) Bargain purchase option: “the lease contains a bargain purchase option,” c) Lease term: “the lease term is equal to 75 percent or more of the estimated economic life of the leased property,” or d) Minimum lease payments: “the present value at the beginning of the lease term of the minimum lease payments… equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception.” Since the three-year lease term...
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...Lessee Ltd • Lease payment at the end of the year • The lease contains no purchase or renewal options • Other expenses are also to be paid by Lessee $2000 • The fair value of the equipment at lease inception is $265,000. • salvage value of the equipment is expected to be $2,000 • Lessee Inc. has guaranteed $20,000 as the residual value at the end of the lease term. Capital Lease The lease is a capital lease because the useful life of the • Lease Classification Criteria 840-10-25-1 Lease term. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease. Use the 10% incremental borrowing rate • 840-10-25-31 A lessee shall compute the present value of the minimum lease payments using the lessee's incremental borrowing rate unless both of the following conditions are met, in which circumstance the lessee shall use the implicit rate: a. It is practicable for the lessee to learn the implicit rate computed by the lessor. b. The implicit rate computed by the lessor is less than the lessee's incremental borrowing rate. Interest Amortization • Amortization: 840-30-35-6 During the lease term, each minimum lease payment shall be allocated by the lessee between a reduction of the obligation...
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...Group 4 Case 11-6 Lessee Ltd. Lessee Ltd. (a British company that applies IFRSs) and Lessor Inc. had a lease agreement starting on January 1, 2007 which Lessee Ltd. rents equipment from Lessor Inc. for three years. The remaining useful life of the equipment is four years. The fair value of the equipment is $265,000. At the end of the lease term, Lessee Ltd. has guaranteed $20,000 as the residual value. The agreement contains no purchase or renewal options, which means at the end of the lease term, Lessee Ltd. needs to return this equipment to Lessor Inc. in original condition. According to the agreement, Lessee Ltd. needs to make lease payments of $100,000 to Lessor Inc. each year. Also, Lessee Ltd. is responsible for other expenses like insurance, tax and maintenance that cost $2,000 per year. The lessee’s incremental borrowing rate is 11% and Lessor’s implicit rate is 10%. Two accountants of Lessee Ltd. analyzed the assets of the lease. For the present value of lease obligation, if using the implicit rate in the lease (10%), the residual value would be $15,026 and the present value of annual payment would be $248,690. If using the incremental borrowing rate (11%), the residual value would be $14,624 and present value of annual payment would be $244,370. But on the computations of lease payments, the junior and senior accountant used two different ways. The junior accountant defined it is an operating lease and simply added lease expense and insurance expense together...
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...Facts Lessee Ltd, a British company has leased equipment from Lessor Ltd, as of January 1, 2007 for three years. On expiration the equipment reverts to Lessor Ltd. Annual expenses include a lease payment of $100,000 and other expenses of $2,000 with no expenses incurred by Lessor Ltd. The remaining useful life of the equipment is 4 years. At the time, the equipment had a Fair Market Value (FMV) of $265,000. Lessee Ltd guaranteed a residual value of $20,000 by the end of the lease term. The salvage value of the equipment was estimated as $2000 at the end of the economic life. The lessor’s implicit rate was calculated at 10% with the Present Value (PV) of the residual at $15,026 and lease payments at $248,690. The lessee’s incremental borrowing rate is 11% with the PV of the residual at $14,624 and lease payments at $244,370. Issue Is the lease an operating lease as analyzed and interpreted by the junior accountant or is it a finance lease along with other calculations as determined by the senior accountant? Would the answer differ if Lessee Ltd were to adapt U.S GAAP accounting policies as opposed to IFRS? Rule The IFRS standards are known by the name International Accounting Standards (IAS). The IAS 17 helps distinguishes between lease transactions. It states, “A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the...
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...Background Lessee Ltd., a British company operating under IFRS, leased equipment from Lessor Inc. for a period of three years. Lease payments of $100,000 are paid annually by Lessee Ltd., as well as $2,000 of other expenses including insurance, taxes and maintenance. The lessee’s incremental borrowing rate is listed at 11%, and the lessor’s implicit rate is calculated at 10%. The equipment reverts back to the lessor at the termination of the lease. The equipment has a 4-year useful life and a fair value of $265,000. Additionally, the guaranteed residual value of the equipment is $20,000 and the expected salvage value is $2,000. Issue #1: How should Lessee Ltd.’s Lease Be Classified? International Accounting Standard 17.10 states five examples of situations that “individually or in combination would normally lead to a lease being classified as a finance lease.” Two of the statements are relevant in classifying the lease as a finance lease. IAS 17.10.c says that the lease term must be for the “major part of the economic life of the asset.” Since the lease term is three years and the useful life of the equipment is four years, the lease term is 75% of the useful life of the asset which would constitute as a “major part” of the economic life of the equipment. Additionally, per IAS 17.10.d “at the inception of the lease the present value of the minimum lease payments [should] amount to at least substantially all of the fair value of the leased asset.” The present value of...
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...for ‘Major Portion’ of the expected economic life of the asset and the present value of the minimum lease payments is equal to or greater than ‘substantially all’ of the fair value of the asset.” (IAS 17, n.d.) The senior accountant stated “The lease term is for three years. The useful life of the equipment is for four years. Since the lease term is for a major part of the useful life of the equipment, it is a finance lease.” (Deloitte, 2010) He is obviously the senior accountant for a reason, he understood that he needed to follow IFRS regulations and standards. 3. How would the answer differ under U.S. GAAP? As stated in the Master Glossary of the Codification, an operating lease can be defined two ways. “From the perspective of a lessee, any lease other than a capital lease and from the perspective of a lessor, a lease that meets the conditions in paragraph 840-10-25-43(d).” (FASB, n.d) Paragraph 840-10-25-43(d) states that a lease is an operating lease if it does not meet any of the four criteria below: “The lease transfers...
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...Accounting for Leases under IFRS Lease classification A lease is an agreement between lessor and lessee, whereby the lessor passes to the lessee the right to use an asset for an agreed period of time in return for a payment or series of payments. Under IFRS IAS (17) Leases we recognize two types of leases, finance and operating: IAS 17, paragraph 8: “A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.” IFRS further, in paragraphs 10 and 11, provides examples and indicators that “individually or in combination” would serve as criteria to classify a lease as finance lease. IAS 17, paragraph 10: “Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; (c) the lease term is for the major part of the economic...
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...My discussion topic is Martin v. Hunter’s Lessee (1816), in which Justice Joseph Story ruled that under Section 25 of the Judiciary Act of 1789, the Supreme Court was authorized to review state court decisions pertaining to federal law. This was significant in the shaping of the U.S. government in that “the court rejected the notion of duel judicial sovereignty, in which the state courts and the federal courts have separate and independent domains of power, and instead asserted the primacy of federal courts over federal law.” (Mc Bride, 2006) In other words, if a state appeals a case before the Supreme Court, but disagrees with its decision, the aforementioned state cannot override said decision, which then ensures that the Supreme...
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...Name: Exercise: "E21-3, Lessee Entries; Capital Lease with Executory Costs and Unguaranteed Residual Value" Course: Date: Assume that on January 1, 2011, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Trevino Storage Company. The following information pertains to this lease agreement: 1. The agreement requires equal rental payments of $90,000 beginning on January 1, 2011. 2. The fair value of the building on January 1, 2011, is $550,000 "3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of " $10,000 Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. "5. Kimberly-Clark's incremental borrowing rate is 12% per year. The lessor's implicit rate is not known by Kimberly-Clark." 6. The yearly rental payment includes $3,088.14 of executory costs related to taxes on the property. Instructions: Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2011 and 2012. Kimberly-Clark’s corporate year end is December 31. Capitalized amount of the lease: Yearly payment...
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..._______________________________________ , hereinafter referred to as the “LESSOR”. -and- MR./MRS__________________________________________________with address at __________________PASSPORT NO.:______________________hereinafter referred to as the “LESSEE”, WITNESSETH: THAT WHEREAS, the LESSOR is the registered, legal, absolute owner of ___________________________________ (2 Bedrooms-Fully Furnished) w/ Parking Slot and , furnished as per Annex “A” hereof, hereinafter referred to as the “LEASED PREMISES”. WHEREAS, the LESSEE desires to lease the above-mentioned LEASED PREMISES, and the LESSOR is willing to lease the same unto the LESSEE subject to the terms and conditions hereinafter specified. NOW, THEREFORE, for and in consideration of the foregoing and the mutual covenants hereinafter set forth, the LESSOR has let and leased, and by these presents does hereby lease unto the LESSEE the aforesaid LEASED PREMISES known as _____________________ , and the LESSEE hereby accepts the same by way of lease, subject to the following terms and conditions: 1. PERIOD OF LEASE. The lease shall be for a period of __________________from _____________, 200_ to_________________200_, renewal thereafter upon mutual agreement. The LESSEE must signify its intention to renew or not renew by written notice thereof to the LESSOR at least THIRTY (30) days prior to the expiration of this Contract of Lease. 2. AMOUNT OF RENT. The parties hereby agree that the monthly rental...
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...Lease Representation Agreement This form is a contract between Graham Real Estate and a lessee that gives the real estate company exclusive permission to act on the Lessee’s behalf in the lease of a property. This is an Exclusive Lessee Representation Agreement Between: GRAHAM REAL ESTATE COMPANY, LIMITED, P.O. Box CB 13443, Nassau, Bahamas. Telephone: (242) 356-5030, Facsimile: (242) 326-5005 Agent/Apprentice:_____________________________________________________________________________________________ And: Lessee(s):___________________________________________________________________________________________________ Address:________________________________________________________________ Tel. No.____________________________ Email Address:______________________________________________________________________________________________ The Lessee hereby gives Graham Real Estate the exclusive authority to act as the Lessee’s Agent commencing at ______/_____/_______ and expiring at ______/_____/_______. As Lessee Representative Graham Real Estate agrees to: a) Use professional knowledge and effort to locate and present real property, which is available for rent and suitable for the Lessee’s needs. b) Assist Lessee through the process of property lease. c) Represent the interests of the Lessee in all negotiation and transactions regarding the lease of real property. This agreement does not guarantee the lease of any property, but it does guarantee...
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...Leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources; and Leases of biological assets, including timber. The new guidance is intended to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations, and the risks to which it is exposed from entering into leasing transactions. Under existing accounting standards, a majority of leases are not reported on a lessee's balance sheet even though the amounts involved can be substantial. In addition, lessees and lessors are required to classify their leases as either capital leases or operating leases and to account for those leases differently. For a lessee, capital lease assets and liabilities are recognized on the balance sheet while operating lease assets or liabilities are not. When assets and liabilities for leases are not recognized on the balance sheet, most financial statement users make adjustments using disclosures and other available information to estimate the effects of leases on a lessee's financial statements. Currently, the FASB is continuing its...
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...hereinafter called Lessor and Quick Take Video, hereinafter called Lessee This Lease Agreement between Lessor and Lessee dated March 23, 2012 contains the following terms: 1. Objective Lessor hereby leases to Lessee and Lessee hereby leases from Lessor, all equipment for video editing system and services (including training, and resources to provide services that come along with the editing system). 2. Leased Equipment All Equipment shall be leased for the purpose of video editing and services that provide training to the employee of the Lessee. Leased hereunder is as outlined below: Description Quantity ----------- -------- Non-Linear Pro Editing System 1 3. Term of Lease (1) The date of the Lessee's signing the Lease Agreement. The term of this Lease with respect to each item of Equipment shall commence when the signed by Lessee, and the expiration date of this agreement is April 23, 2012. In case of the revocation of this leasing contract by the agreement of both parties, lessee has an option to extended the lease agreement or to purchase the equipment. The purchasing price of the foresaid equipment shall be the amount equal to the original equipment cost less accumulated depreciation cost as of purchasing date. Any right, title and interest pertain to this Leased Equipment shall transfer to Lessee at the time of Equipment Purchase. (2) Upon both parties agreement...
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...to the lessee and what type of lease agreement. In this lease agreement we are focusing operating lease with provisions of NeedSpace and WeHaveIt, which has a 10 year lease term, no options to renew or negotiate renewal offered in the contract and the lessee incurs certain cost, repairs and maintenance. In regards to ASC 840 leases, according to 840-10-20 and 840-10-05-9A, 840-10-05-9B an operating lease is when the lessor the owner of the property gives the lessee the right to use property, plant or equipment for a limited amount of time. Meaning the lessee is responsible by a legal contract to make repairs and maintain leased property. To make sure the lessee adhere to the contract the lessee has to make financial deposits to the lessor called supplemental rent or maintenance reserves. Furthermore, the lessor is required to repay the lessee when all repairs and maintenance is completed to the extent of the amount of the deposits. In some instances, when the cumulative maintenance costs is less than the cumulative deposits over the period of the lease contract. Upon expiration of the lease the lessor maybe entitled to keep the excess deposits depending on the lease agreement. How should NeedsSpace account for the two obligations noted as provisions in the lease agreement? Analysis and Solution ● Provision 1: “Lessor may require the lessee to perform general repairs and maintenance on the leased premises.” By entering the lease agreement, NeedsSpace (the lessee) becomes...
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...asset to the lessee. Another one is operating lease. That is lease other than a finance lease. To decide whether a lease is finance or operating, the first step is to assess whether the risks and rewards of ownership have transferred to the lessee. Risk and rewards of ownership include Risk Rewards * Lessee carries out repairs and maintenance lessee has right to use asset for most or all of its useful life * Lessee insures asset * Lessee runs the risk of losses from idle capacity * Lessee runs the risk of technological obsolescence Throughout following list of situations in which a lease would normally classified as a finance lease The lease transfer the ownership of the asset to the lessee by the end of the lease term The lease term is for the major part of the economic life of the asset even if title is not transferred Gains or losses from fluctuations in fair value are borne by the lessee Advantages of Leasing: 1. Lease permits alternative use 2. Lease arrangements faster and cheaper credit 3. Lessee's ability to raise loans 4. Leasing prevent obsolescence 5. Lease arrangement is particularly beneficial small businesses can not afford to increase their ability, in considering the scarcity of financial resources. Disadvantages Of Leasing Major disadvantages of leasing are as follows: 1. Lessee leasing arrangements do not get ownership of the asset. It only gives the right to use. Therefore, the lessee cannot guarantee...
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