Kế toán, kiểm toán - Accounting for leases

PREVIEW OF CHAPTERIntermediate AccountingIFRS 2nd EditionKieso, Weygandt, and Warfield 21Describe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:Accounting for Leases21LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Largest group of leased equipment involves: Information technology equipmentTransportation (trucks, aircraft, rail)ConstructionAgricultureA lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time.THE LEASING ENVIRONMENTLO 1Who Are the Players?ILLUSTRATION 21-2What Do Companies Lease?BanksIndependentsCredit Suisse (CHE)Chase (USA)Barclays (GBR) Deutsche Bank (DEU)CNH Capital (NLD) (for CNH Global), BMW Financial Services (DEU) (for BMW)IBM Global Financing (USA) (for IBM)Market Share44%30%26%Who Are the Players?THE LEASING ENVIRONMENTCaptive Leasing CompaniesLO 1100% financing at fixed rates. Protection against obsolescence.Flexibility.Less costly financing.Tax advantages.Off-balance-sheet financing.Advantages of LeasingLO 1THE LEASING ENVIRONMENTOFF-BALANCE-SHEET FINANCINGCapitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is non-cancelable.Conceptual Nature of a LeaseLeases that do not transfer substantially all the benefits and risks of ownership are operating leases.LO 1THE LEASING ENVIRONMENTDescribe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Accounting for Leases21If the lessee capitalizes a lease, the lessee records an asset and a liability generally equal to the present value of the rental payments.Records depreciation on the leased asset.Treats the lease payments as consisting of interest and principal.ACCOUNTING BY THE LESSEELO 2ILLUSTRATION 21-2Journal Entries for Capitalized LeaseFor a finance lease, the IASB has identified four criteria.Lease transfers ownership of the property to the lessee. Lease contains a bargain-purchase option.Lease term is for major part of the economic life of the asset.One or more must be met for finance lease accounting.Present value of the minimum lease payments amounts to substantially all of the fair value of the leased asset.ACCOUNTING BY THE LESSEELO 2Lease AgreementLeases that DO NOT meet any of the four criteria are accounted for as operating leases.LO 2ACCOUNTING BY THE LESSEEILLUSTRATION 21-4Diagram of Lessee’s Criteria for Lease ClassificationCapitalization CriteriaTransfer of Ownership TestIf the lease transfers ownership of the asset to the lessee, it is a finance lease.Bargain-Purchase Option TestAt the inception of the lease, the difference between the option price and the expected fair market value must be large enough to make exercise of the option reasonably assured.LO 2ACCOUNTING BY THE LESSEEEconomic Life TestLease term is generally considered to be the fixed, non-cancelable term of the lease. Bargain-renewal option can extend this period. At the inception of the lease, the difference between the renewal rental and the expected fair rental must be great enough to make exercise of the option to renew reasonably assured.Capitalization CriteriaLO 2ACCOUNTING BY THE LESSEEIllustration: Carrefour (FRA) leases Lenovo (CHN) PCs for two years at a rental of €100 per month per computer and subsequently can lease them for €10 per month per computer for another two years. The lease clearly offers a bargain-renewal option; the lease term is considered to be four years. ACCOUNTING BY THE LESSEELO 2Recovery of Investment TestMinimum Lease Payments:Minimum rental paymentsGuaranteed residual valuePenalty for failure to renew or extend the leaseBargain-purchase optionExecutory Costs:InsuranceMaintenanceTaxesExclude from PV of Minimum Lease Payment CalculationCapitalization CriteriaACCOUNTING BY THE LESSEELO 2Recovery of Investment TestDiscount RateCapitalization CriteriaACCOUNTING BY THE LESSEELessee computes the present value of the minimum lease payments using the implicit interest rate. In the event it is impracticable to determine the implicit rate, the lessee should use its incremental borrowing rate.LO 2Asset and Liability Recorded at the lower of:present value of the minimum lease payments (excluding executory costs) orfair market value of the leased asset at the inception of the lease.Asset and Liability Accounted for DifferentlyACCOUNTING BY THE LESSEELO 2Depreciation PeriodIf lease transfers ownership, depreciate asset over the economic life of the asset.If lease does not transfer ownership, depreciate over the term of the lease.Asset and Liability Accounted for DifferentlyACCOUNTING BY THE LESSEELO 2Effective-Interest MethodUsed to allocate each lease payment between principal and interest.Depreciation ConceptDepreciation and the discharge of the obligation are independent accounting processes.Asset and Liability Accounted for DifferentlyACCOUNTING BY THE LESSEELO 2Illustration: CNH Capital (NLD) (a subsidiary of CNH Global) and Ivanhoe Mines Ltd. (CAN) sign a lease agreement dated January 1, 2015, that calls for CNH to lease a front-end loader to Ivanhoe beginning January 1, 2015. The terms and provisions of the lease agreement and other pertinent data are as follows.The term of the lease is five years. The lease agreement is non-cancelable, requiring equal rental payments of $25,981.62 at the beginning of each year (annuity-due basis).The loader has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and no residual value.Ivanhoe pays all of the executory costs directly to third parties except for the property taxes of $2,000 per year, which is included as part of its annual payments to CNH.The lease contains no renewal options. The loader reverts to CNH at the termination of the lease. Ivanhoe’s incremental borrowing rate is 11 percent per year.Ivanhoe depreciates similar equipment that it owns on a straight-line basis.CNH sets the annual rental to earn a rate of return on its investment of 10 percent per year; Ivanhoe knows this fact.ACCOUNTING BY THE LESSEELO 2What type of lease is this? Explain.Capitalization Criteria:Transfer of ownershipBargain purchase optionLease term for major part of economic life of leased propertyPresent value of minimum lease payments substantially all of FMV of propertyNONOFinance Lease, #3ACCOUNTING BY THE LESSEELease term = 5 yrs.Economic life = 5 yrs. PV = $100,000 FMV = $100,000.YESYESLO 2Payment $ 25,981.62Property taxes (executory cost) - 2,000.00Minimum lease payment 23,981.62Present value factor (i=10%,n=5) x 4.16986PV of minimum lease payments $100.000.00Computation of Capitalized Lease Payments** Present value of an annuity due of 1 for 5 periods at 10% (Table 6-5)Ivanhoe uses CNH’s implicit interest rate of 10 percent instead of its incremental borrowing rate of 11 percent because (1) it is lower and (2) it knows about it.ACCOUNTING BY THE LESSEELO 2Leased Equipment 100,000.00 Lease Liability 100,000.00Ivanhoe records the finance lease on its books on January 1, 2015, as:Property Tax Expense 2,000.00Lease Liability 23,981.62 Cash 25,981.62Ivanhoe records the first lease payment on January 1, 2015, as follows.ACCOUNTING BY THE LESSEELO 2ILLUSTRATION 21-6Lease AmortizationSchedule for Lessee—Annuity-Due BasisACCOUNTING BY THE LESSEELO 2Ivanhoe records accrued interest on December 31, 2014 Interest Expense 7,601.84 Interest Payable 7,601.84Prepare the entry to record accrued interest at December 31, 2015.LO 2ACCOUNTING BY THE LESSEEILLUSTRATION 21-6Lease AmortizationSchedule for Lessee—Annuity-Due BasisDepreciation Expense 20,000 Accumulated Depreciation—Leased Equipment 20,000Prepare the required on December 31, 2015, to record depreciation for the year using the straight-line method ($100,000 ÷ 5 years).The liabilities section as it relates to lease transactions at December 31, 2015.ACCOUNTING BY THE LESSEEILLUSTRATION 21-7Reporting Current andNon-Current LeaseLiabilitiesLO 2ILLUSTRATION 21-6Lease AmortizationSchedule for Lessee—Annuity-Due BasisProperty Tax Expense 2,000.00Interest Payable 7,601.84Lease Liability 16,379.78 Cash 25,981.62Ivanhoe records the lease payment of January 1, 2015, as follows.ACCOUNTING BY THE LESSEELO 2Operating Method (Lessee)The lessee assigns rent to the periods benefiting from the use of the asset and ignores, in the accounting, any commitments to make future payments.Illustration: Assume Ivanhoe accounts for the lease as an operating lease. Ivanhoe records the payment on January 1, 2015, as follows.LO 2Rent Expense 25,981.62 Cash 25,981.62ACCOUNTING BY THE LESSEEDescribe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Accounting for Leases21ILLUSTRATION 21-8Comparison of Charges to Operations—Capitalvs. Operating LeasesDifferences using a finance lease instead of an operating lease.Increase in amount of reported debt (both short-term and long-term).Increase in amount of total assets (specifically long-lived assets).Lower income early in the life of the lease, therefore lower retained earnings.ACCOUNTING BY THE LESSEELO 3Describe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Accounting for Leases21Interest revenue.Tax incentives.Residual value profits.Benefits to the LessorACCOUNTING BY THE LESSORLO 4A lessor determines the amount of the rental, basing it on the rate of return—the implicit rate—needed to justify leasing the asset.If a residual value is involved (whether guaranteed or not), the company would not have to recover as much from the lease payments.Economics of LeasingACCOUNTING BY THE LESSORLO 4Operating leases.Finance leasesDirect-financing leasesSales-type leasesClassification of Leases by the LessorACCOUNTING BY THE LESSORLO 4Classification of Leases by the LessorACCOUNTING BY THE LESSORILLUSTRATION 21-10Diagram of Lessor’sCriteria for LeaseClassificationLO 4Describe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Accounting for Leases21In substance the financing of an asset purchase by the lessee.Lessor records:A lease receivable instead of a leased asset. Receivable is the present value of the minimum lease payments plus the present value of the unguaranteed residual value.Direct-Financing Method (Lessor)ACCOUNTING BY THE LESSORLO 5Illustration: Using the data from the preceding CNH/Ivanhoe example we illustrate the accounting treatment for a direct-financing lease. We repeat here the information relevant to CNH in accounting for this lease transaction.The term of the lease is five years beginning January 1, 2015, non-cancelable, and requires equal rental payments of $25,981.62 at the beginning of each year. Payments include $2,000 of executory costs (property taxes).The equipment (front-end loader) has a cost of $100,000 to CNH, a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and no residual value.CNH incurred no initial direct costs in negotiating and closing the lease transaction. ACCOUNTING BY THE LESSOR(continued)LO 5We repeat here the information relevant to CNH in accounting for this lease transaction.The lease contains no renewal options. The equipment reverts to CNH at the termination of the lease.CNH sets the annual lease payments to ensure a rate of return of 10 percent (implicit rate) on its investment as shown.ACCOUNTING BY THE LESSORLO 5The lease meets the criteria for classification as a direct-financing lease for two reasons: the lease term equals the equipment’s estimated economic life, and the present value of the minimum lease payments equals the equipment's fair value. It is not a sales-type lease because there is no difference between the fair value ($100,000) of the loader and CNH’s cost ($100,000).ACCOUNTING BY THE LESSORLO 5ACCOUNTING BY THE LESSORCNH records the lease of the asset and the resulting receivable on January 1, 2015 (the inception of the lease), as follows.Lease Receivable 100,000 Equipment 100,000ILLUSTRATION 21-12Computation of LeaseReceivableCompanies often report the lease receivable in the statement of financial position as “Net investment in finance leases.LO 5ILLUSTRATION 21-13Lease AmortizationSchedule for Lessor—Annuity-Due BasisACCOUNTING BY THE LESSORLO 5Ivanhoe records accrued interest on December 31, 2014 Cash 25,981.62 Lease Receivable 23,981.62 Property Tax Expense/Property Taxes Payable 2,000.00On January 1, 2015, CNH records receipt of the first year’s lease payment as follows.ILLUSTRATION 21-13Lease AmortizationSchedule for Lessor—Annuity-Due BasisACCOUNTING BY THE LESSORLO 5Ivanhoe records accrued interest on December 31, 2014 Interest Receivable 7,601.84 Interest Revenue 7,601.84On December 31, 2015, CNH recognizes the interest revenue earned during the first year through the following entry.ILLUSTRATION 21-13Lease AmortizationSchedule for Lessor—Annuity-Due BasisACCOUNTING BY THE LESSORLO 5At December 31, 2015, CNH reports the lease receivable in its statement of financial position among current assets or non-current assets, or both. It classifies the portion due within one year or the operating cycle, whichever is longer, as a current asset, and the rest with non-current assets.ILLUSTRATION 21-14Reporting Lease Transactions by LessorACCOUNTING BY THE LESSORLO 5LO 5Ivanhoe records accrued interest on December 31, 2014 Cash 25,981.62 Lease Receivable 16,379.78 Interest Receivable 7,601.84 Property Tax Expense/Property Taxes Payable 2,000.00The following entry records the receipt of the second year's lease payment on January 1, 2016.ILLUSTRATION 21-13Lease AmortizationSchedule for Lessor—Annuity-Due BasisACCOUNTING BY THE LESSORIvanhoe records accrued interest on December 31, 2014 Interest Receivable 5,963.86 Interest Revenue 5,963.86The following entry records the recognition of interest earned on December 31, 2016.ILLUSTRATION 21-13Lease AmortizationSchedule for Lessor—Annuity-Due BasisACCOUNTING BY THE LESSORLO 5Records each rental receipt as rental revenue. Depreciates leased asset in the normal manner.Operating Method (Lessor)ACCOUNTING BY THE LESSORLO 5Assuming that the direct-financing lease illustrated for CNH does not qualify as a finance lease, CNH accounts for it as an operating lease and records the cash rental receipt as follows.Cash 25,981.62 Rental Revenue 25,981.62Depreciation is recorded as follows: ($100,000 ÷ 5 years = $20,000)Depreciation Expense 20,000 Accumulated Depreciation 20,000ACCOUNTING BY THE LESSORLO 5Describe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Accounting for Leases21Residual values.Sales-type leases (lessor).Bargain-purchase options.Initial direct costs.Current versus non-current classification.Disclosure.SPECIAL ACCOUNTING PROBLEMSLO 6Describe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Accounting for Leases21Meaning of Residual Value - Estimated fair value of the leased asset at the end of the lease term.Guaranteed versus Unguaranteed – A guaranteed residual value is when the lessee agrees to make up any deficiency below a stated amount that the lessor realizes in residual value at the end of the lease term.Residual ValuesSPECIAL ACCOUNTING PROBLEMSLO 7Lease Payments - Lessor may adjust lease payments because of the increased certainty of recovery of a guaranteed residual value.Lessee Accounting for Residual Value - The minimum lease payment includes a guaranteed residual value but excludes an unguaranteed residual value.Residual ValuesSPECIAL ACCOUNTING PROBLEMSLO 7Illustration: Assume the same data as in the CNH/Ivanhoe illustrations except that CNH estimates a residual value of $5,000 at the end of the five-year lease term. In addition, CNH assumes a 10 percent return on investment (ROI), whether the residual value is guaranteed or unguaranteed. The terms and provisions of the lease agreement and other pertinent data are as follows.The term of the lease is five years. The lease agreement is non-cancelable, requiring equal rental payments of $25,981.62 at the beginning of each year (annuity-due basis).The loader has a fair value at the inception of the lease of $100,000, an estimated economic life of five years.Ivanhoe pays all of the executory costs directly to third parties except for the property taxes of $2,000 per year, which is included as part of its annual payments to CNH.The lease contains no renewal options. The loader reverts to CNH at the termination of the lease. Ivanhoe’s incremental borrowing rate is 11 percent per year.Ivanhoe depreciates similar equipment that it owns on a straight-line basis.CNH sets the annual rental to earn a rate of return on its investment of 10 percent per year; Ivanhoe knows this fact.Lease PaymentsLO 7CNH assumes a 10 percent return on investment (ROI), whether the residual value is guaranteed or unguaranteed. CNH would compute the amount of the lease payments as follows.Lease PaymentsILLUSTRATION 21-15Lessor’s Computation ofLease PaymentsLO 7Guaranteed Residual Value (Lessee Accounting)An additional lease payment that the lessee will pay in property or cash, or both, at the end of the lease term.Lease Accounting for Residual ValueILLUSTRATION 21-16Computation of Lessee’s Capitalized Amount—Guaranteed Residual ValueLO 7Guaranteed Residual Value (Lessee)ILLUSTRATION 21-17Lease Amortization Schedule for Lessee—Guaranteed Residual ValueLO 7At the end of the lease term, before the lessee transfers the asset to CNH, the lease asset and liability accounts have the following balances.Assume that Ivanhoe depreciated the leased asset down to its residual value of $5,000 but that the fair market value of the residual value at December 31, 2019, was $3,000. Ivanhoe would make the following journal entry.Guaranteed Residual Value (Lessee)ILLUSTRATION 21-18Account Balances on Lessee’s Books at End of Lease Term—Guaranteed Residual ValueLO 7Loss on Disposal of Equipment 2,000.00Interest Expense (or Interest Payable) 454.76Lease Liability 4,545.24Accumulated Depreciation—Leased Equipment 95,000.00 Leased Equipment 100,000.00 Cash 2,000.00ILLUSTRATION 21-18Guaranteed Residual Value (Lessee)LO 7Assume the same facts as those above except that the $5,000 residual value is unguaranteed instead of guaranteed. CNH will recover the same amount through lease rentals—that is, $96,895.40. Ivanhoe would capitalize the amount as follows:Unguaranteed Residual Value (Lessee Accounting)Lease Accounting for Residual ValueILLUSTRATION 21-19Computation of Lessee’s Capitalized Amount—Unguaranteed Residual ValueLO 7Unguaranteed Residual Value (Lessee)ILLUSTRATION 21-20Lease Amortization Schedule for Lessee—Unguaranteed Residual ValueLO 7At the end of the lease term, before Ivanhoe transfers the asset to CNH, the lease asset and liability accounts have the following balances.Unguaranteed Residual Value (Lessee)ILLUSTRATION 21-21Account Balances on Lessee’s Books at End of Lease Term—Unguaranteed Residual ValueLO 7Lessee Entries Involving Residual ValuesILLUSTRATION 21-22Comparative Entries for Guaranteed and Unguaranteed Residual Values, Lessee CompanyLO 7LO 7Illustration: Assume a direct-financing lease with a residual value (either guaranteed or unguaranteed) of $5,000. CNH determines the payments as follows.Lessor Accounting for Residual ValueThe lessor works on the assumption that it will realize the residual value at the end of the lease term whether guaranteed or unguaranteed.ILLUSTRATION 21-23SPECIAL ACCOUNTING PROBLEMSLessor Accounting for Residual ValueILLUSTRATION 21-24Lease Amortization Schedule, for Lessor—Guaranteed or Unguaranteed Residual ValueLO 7LO 7Lessor Accounting for Residual ValueIllustration 21-24CNH would make the following entry for this direct-financing lease on 1/1/15.Lease Receivable 100,000.00 Equipment 100,000.00Lessor Accounting for Residual ValueIllustration 21-24CNH would make the following entry for this direct-financing lease on 1/1/15.Cash 25,237.09 Lease Receivable 23,237.09 Property Tax Expense/Property Taxes Payable 2,000.00LO 7Lessor Accounting for Residual ValueIllustration 21-24CNH would make the following entry for this direct-financing lease on 12/31/15.Interest Receivable 7,676.29 Interest Revenue 7,676.29LO 7Describe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Accounting for Leases21Primary difference between a direct-financing lease and a sales-type lease is the manufacturer’s or dealer’s gross profit (or loss).Lessor records the sale price of the asset, the cost of goods sold and related inventory reduction, and the lease receivable.There is a difference in accounting for guaranteed and unguaranteed residual values.Sales-Type Leases (Lessor)SPECIAL ACCOUNTING PROBLEMSLO 8ILLUSTRATION 21-26Sales-Type Leases (Lessor)Direct-Financing versus Sales-Type LeasesLO 8LEASE RECEIVABLE (also referred to as NET INVESTMENT). The present value of the minimum lease payments plus the present value of any unguaranteed residual value. The lease receivable therefore includes the present value of the residual value, whether guaranteed or not.SALES PRICE OF THE ASSET. The present value of the minimum lease payments.COST OF GOODS SOLD. The cost of the asset to the lessor, less the present value of any unguaranteed residual value.LO 8Sales-Type Leases (Lessor)Illustration: To illustrate a sales-type lease with a guaranteed residual value and with an unguaranteed residual value, assume the same facts as in the preceding direct-financing lease situation. The estimated residual value is $5,000 (the present value of which is $3,104.60), and the leased equipment has an $85,000 cost to the dealer, CNH. Assume that the fair market value of the residual value is $3,000 at the end of the lease term.Sales-Type Leases (Lessor)LO 8Computation of Lease Amounts by CNH Financial—Sales-Type LeaseILLUSTRATION 21-27Sales-Type Leases (Lessor)LO 8Comparative EntriesIllustration 21-28Sales-Type Leases (Lessor)Lessee must increase the present value of the minimum lease payments by the present value of the option.Only difference between the accounting treatment for a bargain-purchase option and a guaranteed residual value of identical amounts is in the computation of the annual depreciation.Bargain Purchase Option (Lessee)SPECIAL ACCOUNTING PROBLEMSLO 8Accounting for initial direct costs: Operating leases, the lessor should defer initial direct costs.Sales-type leases, the lessor expenses the initial direct costs.Direct-financing lease, the lessor adds initial direct costs to the net investment.Initial Direct Costs (Lessor)SPECIAL ACCOUNTING PROBLEMSLO 8Both the annuity-due and the ordinary-annuity situations report the reduction of principal for the next period as a current liability/current asset.Current versus NoncurrentSPECIAL ACCOUNTING PROBLEMSLO 8The current portion of the lease liability/receivable as of December 31, 2015, would beCurrent versus Noncurrent$18,017.70.ILLUSTRATION 21-29Lease AmortizationSchedule—Ordinary-Annuity BasisLO 8Describe the lessor’s accounting for direct-financing leases.Identify special features of lease arrangements that cause unique accounting problems.Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Describe the lessor’s accounting for sales-type leases.List the disclosure requirements for leases.After studying this chapter, you should be able to:LEARNING OBJECTIVESExplain the nature, economic substance, and advantages of lease transactions.Describe the accounting criteria and procedures for capitalizing leases by the lessee.Contrast the operating and capitalization methods of recording leases.Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor.Accounting for Leases21For lessees:A general description of material leasing arrangements.A reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value.The total of future minimum lease payments at the end of the reporting period, and their present value for periods (1) not later than one year, (2) later than one year and not later than five years, and (3) later than five years.Disclosing Lease DataSPECIAL ACCOUNTING PROBLEMSLO 9For lessors:A general description of material leasing arrangements.A reconciliation between the gross investment in the lease at the end of the reporting period, and the present value of minimum lease payments receivable at the end of the reporting period. Unearned finance income. The gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for periods (1) not later than one year, (2) later than one year and not later than five years, and (3) later than five years.Disclosing Lease DataSPECIAL ACCOUNTING PROBLEMSLO 9To avoid leased asset capitalization, companies design, write, and interpret lease agreements to prevent satisfying any of the four finance lease criteria.The real challenge lies in disqualifying the lease as a finance lease to the lessee, while having the same lease qualify as a finance (sales or financing) lease to the lessor. Unlike lessees, lessors try to avoid having lease arrangements classified as operating leases.Unresolved Lease Accounting ProblemsLO 9LEASE ACCOUNTINGLeasing is a global business. Lessors and lessees enter into arrangements with one another without regard to national boundaries. Although U.S. GAAP and IFRS for leasing are similar, both the FASB and the IASB have decided that the existing accounting does not provide the most useful, transparent, and complete information about leasing transactions that should be provided in the financial statements.GLOBAL ACCOUNTING INSIGHTSRelevant FactsFollowing are the key similarities and differences between U.S. GAAP and IFRS related to accounting for leases.SimilaritiesBoth U.S. GAAP and IFRS share the same objective of recording leases by lessees and lessors according to their economic substance, that is, according to the definitions of assets and liabilities. Much of the terminology for lease accounting in U.S. GAAP and IFRS is the same. Under U.S. GAAP and IFRS, lessees and lessors use the same general lease capitalization criteria to determine if the risks and rewards of ownership have been transferred in the lease.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesOne difference in lease terminology is that finance leases are referred to as capital leases in U.S. GAAP. U.S. GAAP for leases uses bright-line criteria to determine if a lease arrangement transfers the risks and rewards of ownership; IFRS is more general in its provisions. U.S. GAAP has additional lessor criteria: payments are collectible, and there are no additional costs associated with a lease. U.S. GAAP requires use of the incremental rate unless the implicit rate is known by the lessee and the implicit rate is lower than the incremental rate. IFRS requires that lessees use the implicit rate to record a lease unless it is impractical to determine the lessor’s implicit rate.GLOBAL ACCOUNTING INSIGHTSRelevant FactsDifferencesUnder U.S. GAAP, extensive disclosure of future non-cancelable lease payments is required for each of the next five years and the years thereafter. IFRS does not require it although some companies provide a year-by-year breakout of payments due in years 1 through 5.The FASB standard for leases (SFAS No. 13) has been the subject of more than 30 interpretations since its issuance. The IFRS leasing standard is IAS 17, first issued in 1982. This standard is the subject of only three interpretations. One reason for this small number of interpretations is that IFRS does not specifically address a number of leasing transactions that are covered by U.S. GAAP. Examples include lease agreements for natural resources, sale-leasebacks, real estate leases, and leveraged leases.GLOBAL ACCOUNTING INSIGHTSOn the HorizonLease accounting is one of the areas identified in the IASB/FASB Memorandum of Understanding. The Boards have issued proposed rules based on “right of use,” which requires that all leases, regardless of their terms, be accounted for in a manner similar to how finance leases are treated today. That is, the notion of an operating lease will be eliminated, which will address the concerns under current rules in which no asset or liability is recorded for many operating leases. A final standard is expected in 2015. You can follow the lease project at the IASB website ( ACCOUNTING INSIGHTSLO 10 Understand and apply lease accountingconcepts to various lease arrangements.ILLUSTRATION 21A-1Illustrative LeaseSituations, LessorsAPPENDIX 21AEXAMPLES OF LEASE ARRANGEMENTSAPPENDIX 21AEXAMPLES OF LEASE ARRANGEMENTSILLUSTRATION 21A-2Comparative Entries forOperating LeaseLO 10LO 10APPENDIX 21AEXAMPLES OF LEASE ARRANGEMENTSILLUSTRATION 21A-3Comparative Entries forFinance Lease—Bargain-Purchase OptionLO 10APPENDIX 21AEXAMPLES OF LEASE ARRANGEMENTSLO 10APPENDIX 21AEXAMPLES OF LEASE ARRANGEMENTSILLUSTRATION 21A-4Comparative Entries forFinance LeaseLO 10APPENDIX 21AEXAMPLES OF LEASE ARRANGEMENTSLO 10APPENDIX 21AEXAMPLES OF LEASE ARRANGEMENTSILLUSTRATION 21A-5Comparative Entries forOperating LeaseLO 10LO 11 Describe the lessee’s accounting for sale-leaseback transactions.The term sale-leaseback describes a transaction in which the owner of the property (seller-lessee) sells the property to another and simultaneously leases it back from the new owner.Advantages:FinancingTaxesAPPENDIX 21BSALE-LEASEBACKSDETERMINING ASSET USETo the extent the seller-lessee continues to use the asset after the sale, the sale-leaseback is really a form of financing. Lessor should not recognize a gain or loss on the transaction. If the seller-lessee gives up the right to the use of the asset, the transaction is in substance a sale. Gain or loss recognition is appropriate.LO 11APPENDIX 21ASALE-LEASEBACKSIf 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 any profit or loss it experiences from the sale of the assets that are leased back under a finance lease.Amortize profit over the lease term .LesseeAPPENDIX 21ASALE-LEASEBACKSLO 11If none of the finance lease criteria are satisfied, the seller-lessee accounts for the transaction as a sale and the lease as an operating lease. Lessee defers such profit or loss and amortizes it in proportion to the rental payments over the period when it expects to use the assets.LesseeAPPENDIX 21ASALE-LEASEBACKSLO 11If the lease meets one of the lease capitalization criteria, the purchaser-lessor records the transaction as a purchase and a direct-financing lease. If the lease does not meet the criteria, the purchaser-lessor records the transaction as a purchase and an operating lease.LessorAPPENDIX 21ASALE-LEASEBACKSLO 11Japan Airlines (JAL) on January 1, 2015, sells a used Boeing 757 having a carrying amount on its books of $75,500,000 to CitiCapital for $80,000,000. JAL immediately leases the aircraft back under the following conditions:The term of the lease is 15 years, non-cancelable, and requires equal rental payments of $10,487,443 at the beginning of each year.The aircraft has a fair value of $80,000,000 on January 1, 2015, and an estimated economic life of 15 years.JAL pays all executory costs.JAL depreciates similar aircraft that it owns on a straight-line basis over 15 years.The annual payments assure the lessor a 12 percent return. JAL’s incremental borrowing rate is 12 percent.SALE-LEASEBACK EXAMPLEAPPENDIX 21ASALE-LEASEBACKSLO 11This lease is a finance lease to JAL because the lease term is equal to the estimated life of the aircraft and because the present value of the lease payments is equal to the fair value of the aircraft to CitiCapital. CitiCapital should classify this lease as a direct financing lease.APPENDIX 21ASALE-LEASEBACKSSALE-LEASEBACK EXAMPLELO 11APPENDIX 21ASALE-LEASEBACKSLO 11APPENDIX 21ASALE-LEASEBACKSLO 11Copyright © 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.COPYRIGHT