CHAPTER 15 Leases 891 Only the first (title transfers) and second (BPO) classification criteria apply in a land lease. criterion applies if the inception of the lease occurs during the last 25% of an asset’s economic life, you see the possibility of an operating lease. Suppose, for instance, that the original useful life of the warehouses was 40 years. In that case, the current lease term would occur during the last 25% of an asset’s economic life and we would have an operating lease. Losses on Sale-Leasebacks In a sale-leaseback, any gain on the sale of the asset is deferred and amortized. However, a real loss on the sale of the property is recognized immediately—not deferred. A real loss means the fair value is less than the book value of the asset. On the other hand, if the fair value exceeds the book value, but the asset is sold to the buyer/lessor for less than the book value, an artificial loss is produced that is probably in substance a prepayment of rent and should be deferred and amortized. International Financial Reporting Standards Recognizing a Gain on a Sale and Leaseback Transaction. Operating Lease: When the leaseback is an operating lease (as long as the lease payments and sales price are at fair value), under IAS No. 17, any gain on the sale is recognized immediately but is amortized over the lease term using U.S. GAAP. 33 For example, suppose Madison Storage sold its warehouse to an insurance company on January 1, 2016, for $400,000 and immediately leased the building back. The operating lease calls for annual rental payments of $25,000 for 12 years of the building’s estimated 50-year useful life. The building has a fair value of $400,000 and a book value of $325,000 (its original cost was $500,000). The rental payments of $25,000 are payable to the insurance company each December 31. Here’s a comparison: ● LO15–11 33 “Leases,” International Accounting Standard No. 17 (IASCF), as amended effective January 1, 2014. IFRS ILLUSTRATION U.S. GAAP IFRS January 1, 2016 Cash (given) 400,000 400,000 Accumulated depreciation (cost minus book value) 175,000 175,000 Building (original cost) 500,000 500,000 Deferred gain on sale-leaseback 75,000 Gain on sale-leaseback (difference) 75,000 December 31, 2016 Rent expense 25,000 25,000 Cash (lease payment) 25,000 25,000 Deferred gain on sale-leaseback 6,250 Rent expense ($75,000 ÷ 12 years) 6,250 Finance (Capital) Lease: When the leaseback is a finance (capital) lease, under IAS No. 17, the gain is recognized over the lease term, but is recognized over the useful life of the asset under U.S. GAAP. When debiting the deferred gain each period, by either set of standards, the credit is to depreciation expense. Real Estate Leases Some leases involve land—exclusively or in part. The concepts we discussed in the chapter also relate to real estate leases . But the fact that land has an unlimited life causes us to modify how we account for some leases involving real estate.
Spiceland_Inter_Accounting8e_Ch15
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