Kế toán, kiểm toán - Chapter 20: Leases

CHAPTER 20:LEASES2CHAPTER 20: LeasesAfter studying this chapter, you should be able to:Understand the importance of leases from a business perspective.Explain the conceptual nature, economic substance, and advantages of lease transactions.Identify and apply the criteria that are used to determine lessee right-of-use assets under IFRS 16 and leases under the ASPE classification methods.Calculate the lease payment that is required for a lessor to earn a specific return.Account for right-of-use assets by lessees under IFRS 16. Determine the effect of, and account for, residual values and purchase options for a lessee’s right-of-use asset (IFRS) or a capital lease (ASPE).Account for operating leases by lessees under ASPE (and short-term leases and low-value under IFRS 16) and compare the operating and capitalization methods of accounting for leases.Determine the statement of financial position presentation of a right-of-use assets (and ASPE capital leases) and identify other disclosures required.Identify and apply the criteria that are used to determine the type of lease for a lessor under the classification approach.Account for and report basic financing and sales-type leases by a lessor.Account for and report financing and manufacturer/dealer or sales-type leases, with guaranteed residual values or a purchase option, by a lessor.Account for and report on operating leases by a lessor.Identify differences in accounting between ASPE and IFRS, and what changes are expected in the near future.3Importance of LeasesLeasing is popular because it is a cost-effective way of financing property and equipmentThis is especially true for items that become obsolete quicklyFrom an accounting standpoint, leases have been controversial because many are “off-balance sheet”Standard setters have been concerned about this lack of transparency for many years4Leasing EnvironmentA lease is a contractual agreement between the lessor and the lesseeThe lease gives the lessee the right to use specific property (owned by the lessor)The lease specifies also the duration of the lease and rental paymentsThe obligations for taxes, insurance, and maintenance (executory costs) may be assumed by the lessor or the lessee or divided5Leasing EnvironmentIn Canada, there are three main types of lessors:Manufacturer finance companiesSubsidiaries whose main business is leasing (e.g., Honda Canada Finance Inc.)Independent finance companiesFinancial intermediariesTraditional financial institutionsSubsidiaries of domestic and foreign banks6Advantages of Leasing100% financing at a fixed rateNo down payment requiredRate charged is fixed for the term of the leaseProtection from obsolescenceProperty can be upgradedFlexibilityLease may be structured to meet different needs (e.g., cash flow)Less costly financing (lessee) and tax incentives (lessor)Off-balance sheet financingDoes not impact ratios7Conceptual Nature of LeaseDo not capitalize any leased assets – an executory contract approachSince lessee does not own the property, capitalization is considered inappropriateSince other executory contracts are not capitalized, leases should not be eitherCapitalize leases that are similar to instalment purchases – a classification approachif installment purchases are capitalized, so should leases with similar characteristicsCapitalize all long-term leases – a contract-based approachThe long-term right to use property justifies its capitalization8Current StandardsFormer IFRS, ASPE, and FASB standards were consistent with the classification approach A lease that transfers substantially all the benefits and risks of property ownership should be capitalized (classified as finance/capital lease)A lease where benefits and risks of ownership are not transferred is classified as operating leaseThe newly introduced standard (IFRS 16) adopts the contract-based approach, based on the view that:Lease contracts create assets and liabilities that should be recognizedAlmost all leases would be capitalized9IFRS Lease CriteriaUnder IFRS 16, from lessee’s standpoint, all leases are capitalized and placed on the SFP. Exceptions permitted only when:The lease is for a term of 12 months or lessThe underlying asset is of low value If a lease is not capitalized, the lessee recognizes the lease payments as an expense on a straight-line basis over the lease term (or another systematic approach)10Classification Criteria: IFRSUnder IFRS 16, companies must assess whether each contract they enter into is a leaseA contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration Instead of a period of time such as months or years, a lease can also be described by the extent of use of the assetThe objective is for the financial statements to represent faithfully the effects of leases on each company’s financial position, income and cash flows 11Classification Criteria: ASPEUnder ASPE, a classification approach is used to classify a lease as finance if it substantially transfers the risks and rewards of ownership from the lessor to the lesseeIf risks and rewards are not substantially transferred, the lease is classified as operatingASPE focuses on the transfer of risks and rewards of ownership for classification of leases both for lessees and lessors12ASPE CriteriaASPE requires that the lessee classify the lease as a capital lease if any one of the following criteria is met:There is reasonable assurance that the lessee will obtain ownership of the leased property, including through a bargain purchase option The lessee will benefit from most of the asset benefits due to the length of the lease term—this is usually assumed to occur if the lease term is 75% or more of the leased property’s economic lifeThe present value of the minimum lease payments is equal to 90% or more of the fair value of the leased assetOverall, under ASPE, the numerical thresholds tend to be the key decision criteria13Minimum Lease PaymentsMinimum lease payments (lessee) defined:Minimum rental payments +Amounts guaranteed +Bargain purchase optionMinimum rental paymentsRegular payment made to lessor, excluding executory costsExecutory costs include insurance, maintenance and tax expensesIf these payments are made by the lessor, they are estimated and excluded from the PV of minimum rental payment calculation14Minimum Lease PaymentsGuaranteed amountsGuaranteed residual value (GRV): guaranteed value of the leased asset at the end of the lease term For lessee, maximum amount lessor can require lessee to pay at end of the leaseBargain Purchase Option (BPO)An option to purchase the leased asset at the end of the lease at a price below expected fair value15Discount RateRate implicit in the lease: rate that makes PV of: MLP + unguaranteed residual values = FV of leased assetIncremental borrowing rate: the rate the lessee would have incurred if they had borrowed the funds to purchase the assetUnder similar term (length) and similar security (same type of asset)Under IFRS, use the rate implicit in the lease if it is reasonably determinableUnder ASPE, use the lower of the two rates Note: under APSE, the leased property cannot be capitalized at more than its fair value 16Determining Rental PaymentsLessor sets rental payments to earn a specific rate of return (i.e., the implicit rate)If the lease has a BPO or residual value, these components do not need to be recovered through rental payments 17Determining Rental Payments - ExampleGiven:Lessor Corporation wants to earn a 10% return on its investment of $100,000Lessee Corporation is leasing the asset for five yearsAnnual rental payments are due at the beginning of each yearThere is no purchase option that is reasonably certain to be exercised (BPO) or residual value at the end of the leaseCalculate the payment required to provide lessor with required rate of return18Determining Rental Payments - ExampleCost/FMV of asset to be recovered $100,000Less: PV of expected residual value -0-Amount to be recovered through lease payments $100,000PV of Annuity due (n=5, i=10%) 4.16986Payments: ($100,000/4.16986) $23,981.62Total lease payments: 5 x $23,981.62 = $119,908.1019Accounting for a Right-of-Use AssetThe asset is recognized initially at cost, based on the present value of the lease payments, which includes variable payments and contingent payments over the term of the leasePayments for the exercise of purchase options are included only if it is reasonably certain the lessee will exercise the optionThe lease term is generally considered the non-cancellable period of the lease, extended if it is reasonably certain the lessee will exercise an option to extend the lease20Accounting for a Right-of-Use AssetThe asset’s cost should be amortized to expense on a systematic basis over the term of the lease Consistent with other standards, if the right-of-use assets are revalued, gains and losses on revaluation would be recognized in accordance with IAS 38 Intangible Assets The right-of-use asset would also be considered for impairment under the requirements of IAS 36 Impairment of Assets21The Lease LiabilityInterest expense resulting from the lease transaction is recorded following the effective interest methodThe discount rate used to establish the initial PV is used to amortize the leaseEach lease payment is allocated between principal and interest22Accounting for a Right-of-Use Lease – Journal EntriesAt the inception of the lease:Dr. Right-of-use asset Cr. Lease liability Cr. CashTo accrue interest:Dr. Interest Expense Cr. Interest Payable*Using the EffectiveInterest MethodTo record asset depreciation:Dr. Depreciation Expense Cr. Accumulated DepreciationUsing methodappropriate to the assetTo record the lease payment:Dr. Interest Payable*Dr. Lease liability Cr. Cash(* Note: may adjust Lease Liability directly for these J/Es) 23Right-of-Use Lease - ExampleGiven:Lease term of 6 years, non-cancellableAnnual payments $5,000 (due at beginning of each year, starting September 1, 2018)Fair value of asset August 31, 2018, 2022 and 2024: $24,000, $6,000 and $1,000 respectively Probability-weighted expected value of residual $1,000Lessor’s initial direct costs $365Lease has renewal option, which will likely be taken to renew lease for 2 additional years at $4,500 per yearLessee’s incremental borrowing rate = 9%Rate implicit in the lease = 9%Title retained by lessor24Right-of-Use Lease- ExampleEntry to record initial lease transaction: Right-of-Use Asset 23,769 Lease liability 18,769 Cash 5,000Since this is a right-of-use lease, the following must also be recorded (at year end or in each reporting period):Interest expenseAsset depreciation25Right-of-Use Lease - ExampleEntry to record interest (December 31, 2018):Interest Expense 563 Interest Payable 563($23,969 - $5,000)*9%*4/12 = 563Entry to record asset depreciation (December 31, 2018):Depreciation expense 1,320 Accumulated depreciation 1,320($23,769/6 years*4/12)The term of the lease is used to amortize the asset (the “most likely lease term” includes two additional years for the renewal option)26Accounting for Residual ValuesIf the residual value is guaranteed by the lessee, its PV is included in the leased asset and lease obligation recognized In this instance, the leased asset is expected to be returned to the lessor so the lessee depreciates only the capitalized amount less the guaranteed residual amount of the period to the end of the leaseIf the residual value is unguaranteed, it is not included in the leased asset and lease obligation recognized by the lessee27Accounting for Purchase Options Lessee accounting assumes bargain option (or under IFRS 16, a purchase option that is reasonably certain to be exercised) will be exercisedExercise price of the purchase option is included in lease payments and its present value is included as part of the related asset cost and the lease obligation recognizedAsset is amortized over its economic life (not the lease term)It is assumed that purchase option will be exercised and therefore that the asset will be purchased and continue to be used28Accounting for an Operating LeaseLeases where risks and benefits of ownership of leased assets are not transferred to lessee are operating leases (ASPE)Lease payments are treated as rent expense under ASPE: Dr. Rent Expense/Prepaid Rent xx Cr. Cash/Accounts Payable xxLease expense is recognized on a straight-line basis if lease inducements are offeredShort-term or low-value assets under IFRS are accounted for as straight-line leases, similar to APSE operating leases, with a debit to “Low-Value Lease Expense” instead of rent expense29Capital vs. Operating LeasesTotal expenses over lease term are same regardless of accounting method (i.e., operating vs. capital)Timing of expenses over lease term is different Capital leases result in higher expenses in earlier years and lower expenses in later years compared to operating leasesOperating leases result in lower debt-to-equity ratio and improved total asset turnover and return on total assets30Current versus Non-Current ClassificationCurrent portion = principal amount to be repaid within 12 months from date of the statement of financial position (SFP) + interest accrued to SFP dateLong-term = principal amount not payable within 12 months from the SFP date31Disclosure – Right-of-Use or Capital LeasesGiven that right-of-use or capital leases give rise to a leased asset and long-term liability, most disclosures are covered by standards forPP&EIntangible assetsFinancial instrumentsLong-term liabilitiesIFRS requires additional disclosures, including:Net carrying amount of each class of right-of-use assetA separate maturity analysis of lease liabilitiesAdditional qualitative and quantitative information about leasing activities32Disclosure - Operating LeasesLessees must disclose: Future minimum lease payments extending into the futureIFRS requires additional disclosures relating to various lease terms (e.g., conditions relating to subleases and contingent rents)Followers of IFRS 16 have additional required disclosures33Classification Criteria - LessorTypeASPEIFRSOperatingOperating leaseOperating leaseFinancing lease:Sales-typeSales-type leaseManufacturer or dealer leaseororFinancing-typeDirect financing leaseFinance lease34Classification Criteria - LessorUnder IFRS and ASPE, the lessor uses the same criteria as the lesseeHowever under ASPE there are two additional revenue recognition-based considerations that must be passed:Credit risk associated with collection is normalRemaining unreimbursable costs to lessor can be estimatedIf required criteria are not met, the lease is accounted for as an operating leaseUnder ASPE, a lease may qualify as a finance lease by the lessee but be an operating lease for the lessor35Classification Criteria - LessorBoth sales-type and financing-type leases are finance leasesThe difference is whether or not there exists a manufacturer’s or dealer’s profitThe sales-type lease incorporates this profit36Accounting for Financing and Manufacturer/Dealer or Sales-Type LeasesLessor replaces investment in asset to be leased with a lease receivableOver lease term, the receivable is collected and interest is earnedNet investment in the lease = lease payments receivable – unearned interest income, or present value of the items included in the gross investment 37Accounting for a Financing-Type LeaseThe gross investment in the lease and lease payments receivable are equal to:Lease payments (net of executory costs) + salvage/residual value or bargain purchase option (BPO)The net investment in the lease is equal to: the gross investment in the lease discounted at the implicit rateThe unearned interest revenue is the difference between the gross and net investment38Accounting for a Financing-Type Lease - ExampleGiven:Lease term of 5 years, non-cancellableAnnual payments $25,981.62 (receivable at beginning of each year, starting January 1, 2017)Fair value of asset $100,000Economic life = 5 years No residual valueLease payments include $2,000 of executory costs (maintenance fee)Lease has no renewal option, and asset reverts to Lessor at termination of leaseLessor’s implicit rate (required return) =10%Collectibillity is reasonably assuredNo additional costs expected to be incurred by Lessor39Accounting for a Financing-Type Lease - ExampleEntries to record the inception of the lease (January 1, 2017):Equipment Acquired for Lessee 100,000 Cash 100,000Lease Receivable 119,908.10 Equipment Acquired for Lessee 100,000.00 Unearned Interest Income 19,908.10Lease payments receivable (gross investment in lease): (25,981.62 – 2,000) x 5 = 119,908.10Net investment in lease:(25,981.62 – 2,000) x 4.16986 (n=5, i=10%) = 100,00040Accounting for a Financing-Type Lease - ExampleEntry to record first payment (January 1, 2017):Cash ($23,981.62 + $2,000) 25,981.62 Lease Payments Receivable 23,981.62 Maintenance and Repairs Expense 2,000.00Entry to accrue interest earned (December 31, 2017):Unearned Interest Income 7,601.84 Interest Income 7,601.8441Accounting for a Financing-Type Lease - ExampleCalculation of interest earned at December 31, 2017:Amount originally financed $100,000.00Paid on principal Jan. 1/17 (23,981.62)Balance outstanding $ 76,018.38Interest: 10% x 76,018.38 x 12/12 = $7,601.8442Accounting for a Financing-Type Lease - ExampleFinancial Statement Presentation (as at December 31, 2017)Statement of Financial PositionCurrent assetsNet investment in finance leases $23,982Non-current assetsNet investment in finance leases $59,63943Accounting for a Sales-Type LeaseEntries are the same as for financing-type lease, except for:Entry at the inception of the lease must record the sale and cost of goods soldRecall that the sales-type lease includes a manufacturer’s/dealer’s profit marginLessor earns a gross profit on sale + interest as the sale is financed44Accounting for a Sales-Type Lease - ExampleGiven:Take the same data as the finance-type lease example except the asset has been recorded in the Lessor’s inventory at a cost of $85,000 (FMV=$100,000)All previous lessor entries remain the same except for the entry at the lease inceptionSales and Cost of Goods Sold are recorded45Accounting for a Sales-Type Lease - ExampleEntries to record inception of lease (January 1, 2017):Lease Receivable 119,908 Unearned Interest Income 19,908 Sales 100,000 Cost of Goods Sold 85,000 Inventory 85,000Entry to record the first payment (January 1, 2017) is the same:Cash ($23,981+ $2,000) 25,982 Lease Receivable 23,982 Maintenance and Repairs Expense 2,000Entry to accrue interest earned (December 31, 2017) is the same:Unearned Interest Income 7,602 Interest Income 7,60246Accounting for Residual Values - LessorWhether guaranteed or unguaranteed, the residual is included in the lessor calculations for both financing-type leases or sales-type leasesThe accounting result is exactly the same whether the situation involves a residual value or a bargain purchase option that is reasonably certain to be exercised47Manufacturer/Dealer or Sales-Type LeaseSales and cost of goods sold are only recognized for the portion of the asset that is sure to be realizedThe gross profit amount reported on the asset’s sale is the same whether the residual value is guaranteed or notThe PV of any unguaranteed residual is not included in the calculation of either the sales amount or the cost of goods sold48Initial Direct CostsIn a financing-type lease, the initial direct costs are recognized in such a way that they are spread over the term of the lease For a manufacturer/dealer or sales-type lease, the costs are recognized as an expense in the year they are incurred; that is, they are expensed in the same period that the gross profit on the sale is recognized49Disclosure-ASPEUnder ASPE, disclosures by the lessor are limited to the cost and related accumulated depreciation of property that is held for leasing purposes, along with the carrying amount of any impaired lease receivables and related allowance provided for impairment50Disclosure-IFRSLessors report the future minimum lease payments in total as well as the amounts due within one year, between years two and five, and beyond five years Contingent rental income for the period and general information about the entity’s leasing arrangements are also reported Additional requirements are imposed by other standards 51Accounting for an Operating Lease - LessorRisks and benefits of ownership of leased assets are not transferred to lesseeInitial direct costs are allocated over the lease term in proportion to the amount of rental income that is recognized Lease payments are treated as rental income Dr. Cash xx Cr. Rent Revenue xxLeased asset remains on lessor’s books and continues to be depreciated Dr. Depreciation Expense xx Cr. Accumulated Depreciation xx52Operating Lease Disclosure - LessorUnder ASPE, disclose: Separate disclosure of the cost and accumulated amortization of the propertyUnder IFRS, disclosures similar to those for financing leasesRemember, disclosure requirements imposed by other (related) standards also apply (e.g., PP&E, financial instruments, impairment, etc.)53Looking AheadUnder IFRS 16 issued by the IASB in January 2016, there is a significant change to the approach to lease accounting for lessees The new standard is effective January 1, 2019 and as illustrated in this chapter, requires use of a contract-based (right-of-use asset) approach by lessees54