CHAPTER 15 Leases 893 years of the lease term. This delays the recognition of revenues, creating the “hit” in the reporting periods in which a shift to leasing occurs. 2. Under what kind of leasing arrangements would the “hit” not occur? (p. 868) The hit will not occur when HG leases its machines under sales-type leases. In those cases, despite the fact that the contract specifies a lease, in effect, HG actually sells its machines under the arrangement. Consequently, HG will recognize sales revenue (and cost of goods sold) at the inception of the lease. The amount recognized is roughly the same as if customers actually buy the machines. As a result, the income statement will not receive the hit created by the substitution of operating leases for outright sales. ● The Bottom Line ● LO15–1 Leasing is used as a means of financing assets as well as achieving operational and tax objectives. (p. 854) ● LO15–2 In keeping with the concept of substance over form, a lease is accounted for as either a rental agreement or a purchase/sale accompanied by debt financing. ( p. 855 ) ● LO15–3 A lessee should classify a lease transaction as a capital lease if it is noncancelable and if one or more of four classification criteria are met. Otherwise, it is an operating lease. A lessor records a lease as a direct financing lease or a sales-type lease only if two conditions relating to revenue realization are met in addition to one of the four classification criteria. ( p. 856 ) ● LO15–4 In an operating lease a sale is not recorded by the lessor; a purchase is not recorded by the lessee. Instead, the periodic rental payments are accounted for as rent revenue by the lessor and rent expense by the lessee. ( p. 860 ) ● LO15–5 In a capital lease the lessee records a leased asset at the present value of the minimum lease payments. A capital lease is recorded by the lessor as a sales-type lease or direct financing lease, depending on whether the lease provides the lessor a dealer’s profit. ( p. 862 ) ● LO15–6 A sales-type lease requires recording sales revenue and cost of goods sold by the lessor at the inception of the lease. All other entries are the same as in a direct financing lease. ( p. 867 ) ● LO15–7 A bargain purchase option is included as a component of minimum lease payments for both the lessor and the lessee. The lease term effectively ends when the BPO is exercisable. ( p. 870 ) ● LO15–8 A lessee-guaranteed residual value is included as a component of minimum lease payments for both the lessor and the lessee. An unguaranteed residual value is not (but is part of the lessor’s gross investment in the lease). ( p. 873 ) ● LO15–9 Executory costs (maintenance, insurance, taxes, and any other costs usually associated with ownership) are expenses of the lessee. Any costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs and are expensed in accordance with the matching principle. To find the present value of minimum lease payments to capitalize as an asset and liability, the lessee usually uses a discount rate equal to the lower of the rate implicit in the lease agreement and its own incremental borrowing rate. Contingent rentals are not included in the minimum lease payments because they are not determinable at the inception of the lease. ( p. 877 ) ● LO15–10 A gain on the sale of an asset in a sale leaseback arrangement is deferred and amortized over the lease term (or asset life if title is expected to transfer to the lessee). The lease portion of the transaction is evaluated and accounted for like any lease. ( p. 888 ) ● LO15–11 In general, IFRS is considered to be more principles-based while U.S. GAAP is more rules-based. This difference is evident in accounting for leases. To distinguish between a capital lease and an operating lease U.S. GAAP uses four specific classification criteria, whereas IFRS uses a variety of “indicators” of a capital (finance) lease. We also often see differences in the discount rate used and how we account for sale-leasebacks and leases of land and buildings. ( pp. 859, 869, 880, 891 , and 892 ) ●
Spiceland_Inter_Accounting8e_Ch15
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