Kế toán, kiểm toán - Chương học 21: Accounting for leases

Volume 2 H A P T E R 21ACCOUNTING FOR LEASESIntermediate AccountingIFRS EditionKieso, Weygandt, and Warfield EnvironmentWho are players?Advantages of leasingConceptual nature of a leaseAccounting by LesseeAccounting by LessorSpecial Accounting ProblemsCapitalization criteriaAccounting differencesFinance lease methodOperating methodComparisonResidual valuesSales-type leasesBargain-purchase optionInitial direct costsCurrent versus noncurrentDisclosureUnresolved problemsEconomics of leasingClassificationDirect-financing methodOperating methodAccounting for LeasesLargest group of leased equipment involves: Information technologyTransportation (trucks, aircraft, rail)ConstructionAgricultureLO 1 Explain the nature, economic substance, and advantages of lease transactions.A 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 EnvironmentBanksLO 1Who Are the Players?The Leasing EnvironmentCaptive LeasingIndependentsCredit 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%100% financing at fixed rates. Protection against obsolescence.Flexibility.Less costly financing.Tax advantages.Off-balance-sheet financing.The Leasing EnvironmentLO 1 Explain the nature, economic substance, and advantages of lease transactions.Advantages of LeasingCapitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is noncancelable.The Leasing EnvironmentLO 1 Explain the nature, economic substance, and advantages of lease transactions.Conceptual Nature of a LeaseLeases that do not transfer substantially all the benefits and risks of ownership are operating leases.Operating LeaseCapital LeaseRent expense xxx Cash xxx Leased equipment xxx Lease liability xxxAlthough technically legal title may not pass, the benefits from the use of the property do.The Leasing EnvironmentLO 1 Explain the nature, economic substance, and advantages of lease transactions.Substance versus Form If 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 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Journal Entries for Capitalized LeaseIllustration 21-2For 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.Accounting by the LesseeLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.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.Lease AgreementLeases that DO NOT meet any of the four criteria are accounted for as Operating Leases.Accounting by the LesseeIllustration 21-4LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Capitalization CriteriaAccounting by the LesseeTransfer of Ownership TestNot controversial and easily implemented.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 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeEconomic Life TestLease term is generally considered to be the fixed, noncancelable 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.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Capitalization CriteriaIllustration: 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 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Recovery of Investment TestLO 2Accounting by the LesseeMinimum Lease Payments:Minimum rental paymentGuaranteed residual valuePenalty for failure to renew or extendBargain-purchase optionExecutory Costs:InsuranceMaintenanceTaxesExclude from PV of Minimum Lease Payment CalculationCapitalization CriteriaAccounting by the LesseeDiscount RateImplicit interest rateIncremental borrowing rate Capitalization CriteriaLessee 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 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Asset and Liability Recorded at the lower of:present value of the minimum lease payments (excluding executory costs) orfair-market value of the leased asset.Asset and Liability Accounted for DifferentlyAccounting by the LesseeLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseeDepreciation 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.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Asset and Liability Accounted for DifferentlyAccounting by the LesseeEffective-Interest MethodUsed to allocate each lease payment between principal and interest.Depreciation ConceptDepreciation and the discharge of the obligation are independent accounting processes.LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Asset and Liability Accounted for DifferentlyE21-1: On January 1, 2011, Adams Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Adams to make annual payments of $9,968 at the beginning of each year, starting January 1, 2011. The machine has an estimated useful life of 6 years and a $5,000 unguaranteed residual value. Adams uses the straight-line method of depreciation for all of its plant assets. Adams’s incremental borrowing rate is 10%, and the lessor’s implicit rate is unknown (impracticable to determine).LO 2Accounting by the LesseeInstructionsWhat type of lease is this? Explain. Compute the present value of the minimum lease payments.Prepare all necessary journal entries for Adams for this lease through January 1, 2012.E21-1: What type of lease is this? Explain.Accounting by the LesseeCapitalization 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 propertyNONOLease term 5 yrs.Economic life 6 yrs. YES 83.3%FMV of leased property is unknown.Finance Lease, #3LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.Accounting by the LesseePayment $ 9,968Present value factor (i=10%,n=5) 4.16986PV of minimum lease payments $41,565 Leased Machine Under Finance Leases 41,565 Lease Liability 41,565Lease Liability 9,968 Cash 9,9681/1/11 Journal Entries:LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.E21-1: Compute present value of the minimum lease payments.Accounting by the LesseeLO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.E21-1: Lease Amortization ScheduleAccounting by the LesseeDepreciation Expense 8,313 Accumulated Depreciation 8,313 ($41,565 ÷ 5 = $8,313)Interest Expense 3,160 Interest Payable 3,160 ($41,565 – $9,968) X .10]12/31/11LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.E21-1: Journal entries for Adams through Jan. 1, 2012.Accounting by the LesseeLease Liability 6,808Interest Payable 3,160 Cash 9,9681/1/12LO 2 Describe the accounting criteria and procedures for capitalizing leases by the lessee.E21-1: Journal entries for Adams through Jan. 1, 2012.LO 3 Contrast the operating and capitalization methods of recording leases.Accounting by the LesseeOperating MethodThe 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 Adams accounts for it as an operating lease. Adams records this payment on January 1, 2011, as follows. Rent Expense 9,968 Cash 9,968LO 3 Contrast the operating and capitalization methods of recording leases.Accounting by the LesseeE21-1: Comparison of Capital Lease with Operating LeaseInterest revenue.Tax incentives.High residual value.Accounting by the LessorBenefits to the LessorLO 4 Identify the classifications of leases for the lessor.A lessor determines the amount of the rental, based 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 paymentsEconomics of LeasingAccounting by the LessorLO 4 Identify the classifications of leases for the lessor.E21-10 (Computation of Rental): Fieval Leasing Company signs an agreement on January 1, 2010, to lease equipment to Reid Company. The following information relates to this agreement.The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.The cost and fair value of the asset at January 1, 2010, is £343,000.The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of £61,071, none of which is guaranteed.Reid Company assumes direct responsibility for all executory costs. The agreement requires equal annual rental payments, beginning on January 1, 2010.Accounting by the LessorLO 4 Identify the classifications of leases for the lessor.Accounting by the LessorLO 4 Identify the classifications of leases for the lessor.E21-10 (Computation of Rental): Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required. ÷x-££££Operating leases.Direct-financing leases.Sales-type leases.Classification of Leases by the LessorAccounting by the LessorLO 4 Identify the classifications of leases for the lessor.Accounting by the LessorLO 4Illustration 21-10Classification of Leases by the LessorIn 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 5 Describe the lessor’s accounting for direct-financing leases.Accounting by the LessorE21-10: Amortization schedule that would be suitable for the lessor. LO 5 Describe the lessor’s accounting for direct-financing leases.Accounting by the LessorE21-10: Prepare all of the journal entries for the lessor for 2010 and 2011.LO 5 Describe the lessor’s accounting for direct-financing leases.1/1/10 Lease Receivable 343,000 Equipment 343,0001/1/10 Cash 64,400 Lease Receivable 64,40012/31/10 Interest Receivable 27,860 Interest Revenue 27,860Accounting by the LessorLO 5 Describe the lessor’s accounting for direct-financing leases.1/1/11 Cash 64,400 Lease Receivable 36,540 Interest Receivable 27,86012/31/11 Interest Receivable 24,206 Interest Revenue 24,206E21-10: Prepare all of the journal entries for the lessor for 2010 and 2011.Records each rental receipt as rental revenue. Depreciates leased asset in the normal manner.Accounting by the LessorLO 5 Describe the lessor’s accounting for direct-financing leases.Operating Method (Lessor)Illustration: Assume Fieval accounts for the lease as an operating lease. It records the cash rental receipt as follows:Accounting by the LessorLO 5 Describe the lessor’s accounting for direct-financing leases.Cash 64,400 Rental Revenue 64,400Depreciation is recorded as follows:Depreciation Expense 46,989 Accumulated Depreciation 46,989($343,000 – 61,067) / 6 years = 57,167Residual values.Sales-type leases (lessor).Bargain-purchase options.Initial direct costs.Current versus non-current classification.Disclosure.Special Accounting ProblemsLO 6 Identify special features of lease arrangements that cause unique accounting problems.Meaning of Residual Value - Estimated fair value of the leased asset at the end of the lease term.Guaranteed Residual Value – 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 6 Identify special features of lease arrangements that cause unique accounting problems.Lease 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 payments, include the guaranteed residual value but excludes the unguaranteed residual value.Residual ValuesSpecial Accounting ProblemsLO 6 Identify special features of lease arrangements that cause unique accounting problems.Illustration (Guaranteed Residual Value – Lessee Accounting): CNH Capital (NLD) (a subsidiary of CNH Global) and Ivanhoe Mines Ltd. (CAN) sign a lease agreement dated January 1, 2012, that calls for CNH to lease a front-end loader to Ivanhoe beginning January 1, 2012. 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 noncancelable, requiring equal rental payments 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 estimated residual value of $5,000 at the end of the lease.. Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Illustration (Guaranteed Residual Value – Lessee Accounting):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 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.Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Illustration (Guaranteed Residual Value – Lessee Accounting):Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Illustration 21-15NOTE: For the Lessee, the minimum lease payment includes the guaranteed residual value but excludes the unguaranteed residual value.CNH computation of the lease payments:Illustration (Guaranteed Residual Value – Lessee Accounting):Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Illustration 21-16Computation of Lessee’s capitalized amountIllustration (Guaranteed Residual Value – Lessee Accounting):Illustration 21-17Special Accounting ProblemsLO 7Illustration (Guaranteed Residual Value – Lessee Accounting):Illustration 21-18Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.At 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, 2016, was $3,000. Ivanhoe would make the following journal entry.Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Loss on Capital Lease 2,000.00Interest Expense (or Interest Payable) 454.76Lease Liability 4,545.24Accumulated Depreciation 95,000.00 Leased Equipment under Finance Leases 100,000.00 Cash 2,000.00Illustration (Guaranteed Residual Value – Lessee Accounting):Assume the same facts as those above except that the $5,000 residual value is unguaranteed instead of guaranteed. CNH would compute the amount of the lease payments as follows:Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Illustration 21-19Illustration (Unguaranteed Residual Value – Lessee Accounting):Computation of Lease Amortization ScheduleIllustration 21-21Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Illustration (Unguaranteed Residual Value – Lessee Accounting):At the end of the lease term, before Ivanhoe transfers the asset to CNH, the lease asset and liability accounts have the following balances.Illustration 21-21Special Accounting ProblemsLO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Illustration (Unguaranteed Residual Value – Lessee Accounting):Special Accounting ProblemsIllustration 21-22Comparative Entries, Lessee CompanySpecial Accounting ProblemsIllustration: Assume a direct-financing lease with a residual value (either guaranteed or unguaranteed) of $5,000. CNH determines the payments as follows.LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.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 ProblemsIllustration: Lease Amortization Schedule, for Lessor.Illustration 21-24Lessor Accounting for Residual ValueLO 7LO 7 Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.Special Accounting ProblemsIllustration: CNH would make the following entries for this direct-financing lease in the first year.Illustration 21-25Lessor Accounting for Residual ValuePrimary 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.Difference in accounting for guaranteed and unguaranteed residual values.Sales-Type Leases (Lessor)Special Accounting ProblemsLO 8 Describe the lessor’s accounting for sales-type leases.Special Accounting ProblemsLO 8 Describe the lessor’s accounting for sales-type leases.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)Special Accounting ProblemsLO 8 Describe the lessor’s accounting for sales-type leases.Illustration: Computation of Lease Amounts by CNH Financial—Sales-Type LeaseIllustration 21-27Sales-Type Leases (Lessor)Special Accounting ProblemsLO 8 Describe the lessor’s accounting for sales-type leases.Illustration: CNH makes the following entries.Illustration 21-28Sales-Type Leases (Lessor)Special Accounting ProblemsLO 8 Describe the lessor’s accounting for sales-type leases.Illustration: CNH makes the following entries.Illustration 21-28Sales-Type Leases (Lessor)Present value of the minimum lease payments must include 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 8 Describe the lessor’s accounting for sales-type leases.Accounting 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 8 Describe the lessor’s accounting for sales-type leases.IFRS does not indicate how to measure the current and noncurrent amounts. For both 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 8 Describe the lessor’s accounting for sales-type leases.For lessees: General description of material leasing arrangements.Reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value.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 9 List the disclosure requirements for leases.For lessors: General description of material leasing arrangements.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.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 9 List the disclosure requirements for leases.Both 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. 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. Much of the terminology for lease accounting in IFRS and U.S. GAAP is the same. One difference is that finance leases are referred to as capital leases in U.S. GAAP.Under IFRS, lessees and lessors use the same lease capitalization criteria to determine if the risks and rewards of ownership have been transferredin the lease. U.S. GAAP has additional lessor criteria that payments are collectible and there are no additional costs associated with a lease. IFRS requires that lessees use the implicit rate to record a lease, unless it is impractical to determine the lessor’s implicit rate. 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.LO 10Illustration 21A-1Illustrative LeaseSituations, LessorsLO 10 Understand and apply lease accounting concepts to various lease arrangements.Illustration 21A-2Illustration 21A-3LO 10 Understand and apply lease accounting concepts to various lease arrangements.LO 10 Understand and apply lease accounting concepts to various lease arrangements.LO 10 Understand and apply lease accounting concepts to various lease arrangements.Illustration 21A-4LO 10 Understand and apply lease accounting concepts to various lease arrangements.LO 10 Understand and apply lease accounting concepts to various lease arrangements.Illustration 21A-5LO 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:FinancingTaxesCopyright © 2011 John Wiley & Sons, Inc. 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