CHAPTER 15 Leases 869 The difference between the total payments and their present value (selling price of the asset) represents interest. If the price is higher than the cost to the lessor, the lessor realizes a profit on the sale. Illustration 15–9 shows the relationships among various lease components, using dollar amounts from the previous illustration. Lessor: Lessee: SALES-TYPE LEASE CAPITAL LEASE Gross Investment in Lease* $600,000 Minimum Lease Payments Less: Interest during lease term ($120,921) Equals: Selling Price $479,079 Purchase Price (present value of payments) (present value of payments) Less: Profit on sale† ($179,079) Equals: Cost to Lessor $300,000 (irrelevant to lessee) *The lessor’s gross investment in the lease also would include any unguaranteed residual value in addition to the minimum lease payments. Any residual value guaranteed by the lessee is included in the minimum lease payments (both companies). We address these issues later in the chapter. †If profit is zero, this would be a direct financing lease. Illustration 15–9 Lease Payment Relationships Where We’re Headed ● LO15–11 The IASB and FASB are collaborating on a joint project for a revision of lease accounting standards. The Boards have agreed on a “right of use” model by which the lessee recognizes an asset representing the right to use the leased asset for the lease term and also recognizes a corresponding liability for the present value of the lease payments, regardless of the term of the lease. Many people expect the new standard to result in most leases being recorded as an asset for the right of use and a liability for the present value of the lease payments. Thus, the notion of operating leases will disappear. IFRS ILLUSTRATION For an example, let’s revisit Sans Serif’s operating lease in Illustration 15–5 on p. 862. None of the four criteria was met that would have caused it to be a capital lease, including Criterion 4: The FASB and IASB are working together on a standard that would dramatically impact the way we account for leases, perhaps eliminating the concept of operating leases. Is the present value of the minimum lease payments equal to or greater than 90% of the fair value of the asset: NO ( $348,685 < 90% of $479,079) $100,000 3 3.48685 5 $348,685 Lease payments Present value Accordingly, under existing standards, we recorded no asset and no liability for this operating lease. Under the new standard update, on the other hand, Sans Serif would be deemed to have received the “right of use” of the asset and would record an asset for the right of use and a liability for the present value of the lease payments: Right-of-use asset ....................................................................... 348,685 Lease payable (present value of lease payments) .................... 348,685 The impact of any changes will be significant; U.S. companies alone have over $1.25 trillion in operating lease obligations. The new leases standard update is being finalized at the time this text is being written. We provide a more detailed discussion of the new standard update in the Chapter Supplement.
Spiceland_Inter_Accounting8e_Ch15
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