...Leases: Practical implications of the new Leases Standard Introduction The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (the Boards) are working together to improve the accounting for leases. In an effort to achieve this objective, the Boards reached a common ground that a customer (lessee) leasing assets should recognise assets and liabilities arising from those leases, including leases that are off balance sheet today. The Boards jointly published a revised Exposure Draft Leases (the 2013 ED) in May 2013. The Boards received extensive feedback on their proposals, and have heard a broad range of views. Since March 2014 the Boards have re-deliberated on nearly all aspects of the project. They will decide upon the effective date of the new Leases Standard in the next few months. The IASB has indicated that it has plans to issue the new Leases Standard before the end of 2015. The lessee accounting model developed The model is from the view that, at the inception of a lease, the lessee obtains the right to use an asset for a period of time and has an obligation to pay for that right. Therefore, it requires that for all leases, the lessee should: * recognise lease assets and liabilities on the balance sheet, initially measured at the present value of unavoidable lease payments; * recognise amortisation of lease assets and interest on lease liabilities over the lease term; and * separate the total amount of cash paid into...
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...Sable sells and leases equipment to its customers. * Sable entered into a contract with Buildit Co. leasing a bulldozer for construction. * The lease term is 10 years and the economic and useful life of the bulldozer is 15 years. * Annual lease payments due at the end of every year will be $16,000. * Buildit is responsible for maintenance, insurance, and tax payments arising from the lease. * The residual value of the bulldozer at the end of the lease term is estimated at $24,000, although no guarantee of the residual value. * Lease does not transfer ownership of the asset at the end of the lease. * The bulldozer cost Sable $100,000 to manufacture and sells for $135,000. * Sable has recently been selling the bulldozer for $125,000 because of economic situations. * Implicit rate on $135,000 fair value is 5.45%. * Implicit rate on $125,000 fair value is 6.93%. * Payments are expected to be collected when due. Identification of Issues and Alternatives: The major question at hand in this case is whether or not the lease should be classified as a sales-type lease, a direct financing lease, a leveraged lease, or an operating lease. If the lease meets any of the criteria for being a capital lease and meets the extra required criteria for each classification then it is one of the first three, and if not then it is an operating lease. The determination of the type of lease will affect how the lease is classified on...
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...Wren Co. leased a building to Brill under an operating lease for ten years at $50,000 per year, payable the first day of each lease year. Wren paid $15,000 to a real estate broker as a finder’s fee. The building is depreciated $12,000 per year. For year 1, Wren incurred insurance and property tax expense totaling $9,000. Wren’s net rental income for year 1 should be a. $27,500 b. $29,000 c. $35,000 d. $36,500 3. (a) Net rental income on an operating lease is equal to rental revenue less related expenses, as computed below. Rental revenue $50,000 Depreciation expense (12,000) Executory costs (9,000) Finder’s fee ($15,000 ÷10) (1,500) Net rental income $27,500 The finder’s fee ($15,000) is capitalized as a deferred charge at the inception of the lease and amortized over ten years to match the expense to the revenues it enabled the lessor to earn 11. On January 1, year 1, Mollat Co. signed a seven-year lease for equipment having a ten-year economic life. The present value of the monthly lease payments equaled 80% of the equipment’s fair value. The lease agreement provides for neither a transfer of title to Mollat nor a bargain purchase option. In its year 1 income statement Mollat should report a. Rent expense equal to the year 1 lease payments. b. Rent expense equal to the year 1 lease payments less interest expense. c. Lease amortization equal to one-tenth of the equipment’s fair value. d. Lease amortization equal to one-seventh of 80% of the equipment’s...
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...NEATNESS COUNTS = 3 points. Data for nos. 1-3: Impress Inc. leased office from Prime Property Inc. on Oct. 1, 2011 under a 4-year contract that specified rentals payable as follows: for the first lease year, P250,000 annual rent and an annual increase of 10% of the rent from the 2nd to the 4th lease years. The contract also specifies that rent due is payable at the end of each month. All payments were promptly made. 1. What amount of rent income should the lessor recognize for the year ended Dec. 31, 2011? 2. What is the balance of rent payable in the books of the lessee at Dec. 31, 2013? 3. Assuming the lessee makes only one entry at the end of 2012 to record rent expense incurred and rent payments made for the whole year, what should have been that entry? Data for nos. 4-11: Agile Corp. entered into a 5-year operating lease agreement with Pert Co. on July 1, 2012 that specifies the following terms: Basic monthly rent, with the annual rent payable in advance 20,000 Security deposit, refundable at the end of the lease term 50,000 Lease bonus 120,000 To induce the lessee to enter into the lease agreement, the contract provides for 3 months’ free rent. The lessor also agreed to shoulder the cost of transporting the lessee’s equipment to the leased site. Transportation costs totaled P18,000. All amounts due on July 1, 2012 were paid by the lessee. The lessee made permanent improvements to the leased site at a cost of P320,000 with an...
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...Week 7- Leases An agreement whereby the lessor conveys to the lessee in return of a payment series the payments the right to use an asset for an agreed period of time. Step 1 Define a finance lease Lease Risks and rewards has the ownership being transferred Where ownership being risks and rewards Step 2: Discuss risks and rewards Risks: Insurance, maintenance, potential drop in residual value Rewards: use of assets, potential increase in residual value Who bears? Who enjoys? URV MLP MLP MLP Minimum lease payments All minimum payments required by the lessee to the lessor 1. Rental 2. GRV * Guaranteed residual value * The asset will buy the asset from the lessor 3. BPO * Bargain purchase option * Gives the right to lessee to buy the asset that lower than market value MLP = CI 1-11+In +(GRV+BPO1+in) URV * unguaranteed residual value 3 types of leases * Direct finance * Manufacture/ dealer * Sales & lease back Lessor 1. Initial recognition DR Lease receivable xx CR asset xx 2. Subsequent measurement Lease receivable = Pv (MCR) + PV( URV) 3. Subsequent measurement Lease schedule Lessee 1. Initial recognition (Sales & lease back) DR cash xx CR lease asset xx CR deferred gain (L) xx *Deferred gain needs to be amortized 2. record lease Dr increase...
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...http://whatheheckaboom.wordpress.com/2011/12/06/accounting-for-finance-leases-and-operating-leases/ Applicable Standard * IAS 17: Leases Classification of Leases * Finance leases (substantially all of the risks and rewards of ownership are transferred to the lessee) * Operating leases (otherwise) * Note that because Land has indefinite useful life, it is typically classified as an operating lease Calculating Total Finance Charge over Lease Term * Total minimum lease payments (cash) * - Cost of the asset (i.e. lower of fair value and PV of minimum lease payments) * = Total finance charge Accounting for Operating Leases Accounting for Operating Leases as Lessee * P&L * Lease expense recognised in P&L. * Note that lease expense is an accrual item, not a cash item. It is calculated as the total lease payments (cash, incorporating any discounts or deposits) under the contract, spread evenly over the lease term. * Lease payment typically covers both interest and principal payments (just like a mortgage) * Balance sheet * Recognise an asset item (for pre-payments) or liability item (accrual for lease) due to the timing differences between cash payments and lease expense. Accounting in Operating Leases as Lessor * Continue to hold the asset in its books and depreciate as per normal. * Recognise the rental as income, accrual item on the income statement. * Differences in timing between cash and...
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...appropriate risk evaluations of a firms statement of financial position”’. Leases are a common financial tool used by many businesses and individuals on a daily basis to transfer the ownership of many different types of assets. Creditors are largely involved with many leases and company balance sheets as they are always interested in making valued judgements of their financial position with the current leasing disclosure requirements providing some discrepancies for creditors in making these risk evaluations. These issues surrounding the treatment and disclosure of leases provide the need for rigorous speculation into the accounting treatment and classification of the different types of leases so that the users of financial statements are provided with a clear view of a firm’s financial position and performance. With the relative ease in which a company can manipulate the classification of their leases, it makes it hard for creditors to make valued judgements of a company’s balance sheet. The current guidelines of AASB 117 require a company to classify its leases as either a finance lease or an operating lease. Only finance leases are required to be disclosed on a company’s statement of financial position with operating leases being excluded. This is one potential issue arising for creditors as the balance sheet might therefore be an unreliable measure of a company’s financial position. Operating leases are a form of off-balance sheet reporting that “potentially enhances the...
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...finance lease can be recognized. The accounting method for a finance lease and for an operating lease is different. In the leases-joint project of IASB and FASB, opinions about accounting method of lessee divided under two accounting systems. FASB uses a dual approach and IFRS uses a single approach for lessee accounting. Under the single approach, a lessee will recognize all leases as “Type A” leases, which means recognize amortization of the right-of-use (ROU) asset separately from interest on the lease liability. Under IFRS, there are exemption of small-ticket leases and short-term leases for the accounting of lessee. For small-ticket leases, there is no clear benchmark about the classification of “small”. But short-term leases are leases that have leasing term of 12 months or less. Financial reports need to disclose more information weighing the cost. Considering this exemption is for the convenience of companies with insignificant leases, we design the line of 1% of total asset amount. As far as we concerned, comparing to the time limit, the proportion can reflect more precisely the impact on the company. Besides, for a small corporation, making an option for a lease whether to be finance lease or operating lease will cause a huge change of revenue of this year. In other words, we propose a new criterial for defining small assets and small-ticket leases. Therefore, the new standard is aligned with IASB. Scope The standard will be applied in accounting for leases of lessees...
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...Initial measurement The fair value of a liability for a lease termination under a cease-use date approach is the present value of the contractual obligation adjusted for valuation assumptions (e.g., market risk premium and/or profit margin) that reflect the amount a market participant would require to assume the obligation at the measurement date. In valuing a lease under the cease-use date approach, the fair value of the obligation should be determined based on the remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized, reduced by estimated sublease rentals that could be reasonably obtained, even if the entity does not intend to sublease (so long as it is contractually permitted). While ―remaining lease rentals‖ as discussed in ASC 420-10-30-8 is not defined in existing literature, ASC 420-10-30-9 states ―A liability for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the entity shall be measured at its fair value at the cease-use date.‖ Therefore, if executory costs (e.g., common area maintenance costs, real estate taxes) are required to be paid by the lessee as part of the lease contract, those costs will continue to be incurred by the lessee and should be included in any calculation of contract termination costs. The measurement of any net liability would be a discounted amount that includes the nonperformance risk associated with the liability and an appropriate market risk...
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...To Lease or Purchase? May 2, 2011 ACC/400 Peter Ioveno To Lease or Purchase? It is important to know when it is a good time to purchase items or lease items, as an individual and in the business world. If you purchase an item at the wrong time, it could easily put a company as risk for financial hard times. The following will detail some important factors to review when purchasing or leasing is an option. The Differences between Leasing and Purchasing Both leasing and purchasing has its pros and it cons. The trick is to figure out which would be better for a company’s current financial status. Leasing allows a lessee to avoid large down payments, keep updated materials, lower lease payments due to shared tax advantages, and the property that is being leased does not show as an asset or liability. These are all positive factors if your company is a smaller company and does not have the cash to purchase the material or only needs the material for a limited time. Next are a few pros of purchasing through a capital lease. Leasing payments on an operational lease might be higher than those payments on a capital lease due to interest rates and since the company does not own the property, it must not be abused or used to harshly because it will be returned to the lessor. A capital lease gives you tax breaks such as deprecation, while operational leasing does not. As stated above, operational leases (rental agreements) and capital leases (purchasing leases) both have...
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...Photo Barn is one of three current tenants that have been at Burwood One since October 1997. Our business has expanded and contracted several times over the past 18 years and could be currently categorised as in a stable …. When landlord commenced the centre’s long awaited redevelopment, we, along with the other tenants at the time, had to absorb a significant downturn in our business. When the top carpark was blocked off, we saw an immediate drop off in sales, followed by 18-24 months of depressed sales, directly attributable to the reduced foot traffic. The last 12-18 months have shown some recovery in sales since the building works have been completed. In addition to this, our specific sector in the retail market has undergone radical change due to the paradigm shift to digital cameras and smart phones, and the explosion of online sale of cameras and other hardware. We have adapted to these industry changes and our product mix is even more focused on service delivery, and we are no longer reliant on camera sales to contribute to our sales figures. Photo Barn has always been a high quality photo lab, and our product and service range has adapted and expanded to meet the needs of both the local and wider market. We happily co-exist with low end photo product offerings (K-Mart) and attract a clientele willing to pay a reasonable price for our products and services. As an ever evolving business, we look at ways to grow our product offerings. Currently we...
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...Proposed Accounting Standards Update (Revised) Issued: May 16, 2013 Comments Due: September 13, 2013 Leases (Topic 842) a revision of the 2010 proposed FASB Accounting Standards Update, Leases (Topic 840) This Exposure Draft of a proposed Accounting Standards Update of Topic 842 is issued by the Board for public comment. Comments can be provided using the electronic feedback form available on the FASB website. Written comments should be addressed to: Technical Director File Reference No. 2013-270 The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. Notice to Recipients of This Exposure Draft of a Proposed Accounting Standards Update The Board invites comments on all matters in this Exposure Draft and is requesting comments by September 13, 2013. Interested parties may submit comments in one of three ways: Using the electronic feedback form available on the FASB website at Exposure Documents Open for Comment Emailing a written letter to director@fasb.org, File Reference No. 2013270 Sending written comments to ―Technical Director, File Reference...
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...CONTRACT OF LEASE KNOW ALL MEN BY THESE PRESENTS: This Contract of Lease is entered into at Davao City , Philippines, this _______day of ______________200_ by and between: _______________ , _________Citizen, of legal age, with postal address at _______________________________________ , 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_,...
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...accounting treatment for this lease requires an analysis of several factors. We have received analysis from two accountants. Each analysis is incorrect. Our objective is to determine the proper accounting treatment for the lease. 1. Was the junior accountant’s analysis correct? Why or why not? The junior accountant has opinioned that the lease is an operating lease. He has reasoned that it is an operating lease because the equipment reverts to Lessor, Inc. at the conclusion of the lease term. This assertion would be correct if it were the only factor. However, International Accounting Standard (IAS) 17 (2010) lists “Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease” There are two other situations that qualify this lease as a financing lease. The lease term is a major part of the economic life of the asset. The lease term is 3 years. The useful life is four years. The present value of the lease payments amounts to at least substantially all of the fair value of the leased asset. The present value of the leased payments is $248,690. The fair value of the equipment is $265,000. the lease term is for the major part of the economic life of the asset even if title is not transferred; International Accounting Standard 17 (2010 states “Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are (a) the lease term is for the major part of...
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...The FASB and IASB (the Boards) have proposed that substantially all leases be reported on a company’s balance sheet. In the income statement, the results of lease transactions would be recognized under a dual model—as either a financing (i.e., expense would be front-loaded) or ratably over the lease term (i.e., straight line expense). The recognition pattern generally would depend on whether the asset being leased is property (e.g., a building) or non-property (e.g., equipment). • Stakeholders benefit from financial statements that reflect the economics of a transaction. As such, we support the principle that a company should recognize the right to use an asset along with the contractual liability on its balance sheet. And, since not all leases are economically similar, we support a dual model for income statement recognition. However, we do not support an income statement recognition pattern based on the nature of the leased asset because such an approach does not necessarily reflect the economics of the lease. • We support an alternative income statement recognition pattern that is based on whether the lease, in effect, transfers the risks and rewards of ownership such that the company that is leasing the asset has, in substance, purchased the asset. Our alternative eliminates the quantitative bright-lines in existing US lease accounting standards, is familiar to those accustomed to the international lease accounting standards, better reflects the economics of the arrangement...
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