CHAPTER 15 Leases 881 revenue is recognized over the lease term, initial direct costs also are automatically recognized over the lease term to match these costs with the rent revenues they help generate. 2. In direct financing leases, interest revenue is recognized over the lease term, so initial direct costs are recorded at the same time as the interest revenues they help generate. Therefore, initial direct costs are not expensed at the outset but are deferred and recognized over the lease term. This can be accomplished by increasing the lessor’s lease receivable by the total of initial direct costs. Then, as interest revenue is recognized over the lease term at a constant effective rate, the initial direct costs are recognized at the same rate (that is, proportionally). 3. For sales-type leases, initial direct costs are expensed at the inception of the lease. Since the usual reason for a sales-type lease is for a manufacturer or a dealer to sell its product, it’s reasonable to recognize the costs of creating the transaction as a selling expense in the period of the sale. Contingent Rentals Sometimes rental payments may be increased (or decreased) at some future time during the lease term, depending on whether or not some specified event occurs. Usually the contingency is related to revenues, profitability, or usage above some designated level. For example, a quarterly report of Wal-Mart Stores, Inc. , included the note re-created in Illustration 15–15 . Real World Financials Certain of the Company’s leases provide for the payment of contingent rentals based on a percentage of sales. Such contingent rentals were immaterial for fiscal 2014, 2013, and 2012. Illustration 15–15 Disclosure of Contingent Rentals—Walmart Contingent rentals are not included in the minimum lease payments because they are not determinable at the inception of the lease. Instead, they are included as components of income when (and if) they occur or when they are considered probable. Increases or decreases in rental payments that are dependent only on the passage of time are not contingent rentals; these are part of minimum lease payments. Although contingent rentals are not included in minimum lease payments, they are reported in disclosure notes by both the lessor and lessee. A Brief Summary Leasing arrangements often are complex. In studying this chapter you’ve encountered several features of lease agreements that alter the way we make several of the calculations needed to account for leases. Illustration 15–16 on the next page provides a concise review of the essential lease accounting components, using calculations from a hypothetical lease situation to provide a numerical perspective. Lease Disclosures Lease disclosure requirements are quite extensive for both the lessor and lessee. Virtually all aspects of the lease agreement must be disclosed. For all leases (a) a general description of the leasing arrangement is required as well as (b) minimum future payments, in the aggregate and for each of the five succeeding fiscal years. Other required disclosures are specific to the type of lease and include: residual values, contingent rentals, sublease rentals, and executory costs. The lessor must disclose its net investment in the lease . This amount is the present value of the gross investment in the lease , which is the total of the minimum lease The lessor’s net investment in the lease is the present value of the gross investment, which is the total of the minimum lease payments (plus any unguaranteed residual value).
Spiceland_Inter_Accounting8e_Ch15
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