CHAPTER 15 Leases 919 (with the exception of short-term leases as described later). This is the primary change in lease accounting provided by the guidance. It achieves the objective that motivated the reconsideration of lease accounting. Type A Leases: Risks and Rewards of Ownership Transferred Some agreements are called leases, but when we look beyond the “form” of the transactions and focus on their “substance,” we find them to be, in reality, more like purchases of assets to be paid for with installment payments. 37 Sometimes the true nature of an arrangement is obvious. For example, a 10-year lease of a computer with a 10-year useful life, by which title passes to the lessee at the end of the lease term, obviously more nearly represents a purchase than a rental agreement. But what if the terms of the contract do not transfer title, and the lease term is for only seven years of the asset’s 10-year life? Suppose contractual terms permit the lessee to obtain title under certain prearranged conditions? What if compensation provided by the lease contract is nearly equal to the value of the asset under lease? These situations are less clear-cut. Professional judgment is needed to differentiate between leases that represent rental agreements and those that in essence are installment purchases/sales. It’s important to note that from an accounting perspective legal ownership is irrelevant in the decision. The essential question is whether the usual risks and rewards of ownership have been transferred to the lessee. In Illustration 15–24 we have the same straightforward lease agreement we saw in the main chapter in Illustration 15–6 . Let’s first think about this arrangement from the perspective of Sans Serif, the lessee. Because Sans Serif leases the asset for its entire useful life, it would classify the lease as a capital lease under current GAAP and record a leased asset and lease payable. Under the new lease guidance, Sans Serif would classify this arrangement as The lessee records both a right-of-use asset and a liability to pay for that right. On January 1, 2016, Sans Serif Publishers, Inc., leased printing equipment from First LeaseCorp. First LeaseCorp purchased the equipment from CompuDec Corporation at a cost of $479,079. The lease agreement specifies annual payments beginning January 1, 2016, the beginning of the lease, and at each December 31 thereafter through 2020. The sixyear lease term ending December 31, 2021, is equal to the estimated useful life of the equipment. Sans Serif’s borrowing rate for similar transactions is 10%. The price Sans Serif pays for the right to use the equipment is the present value of the lease payments: 37 Like the installment notes we discussed in the previous chapter. Accounting for leases attempts to see through the legal form of the agreements to determine their economic substance. An asset and liability are recorded by the lessee at the present value of the lease payments. 38Illustration 15–6. 39Illustration 15–8. $100,000 3 4.79079* 5 $479,079 Lease Lessee’s Payments cost *Present value of an annuity due of $1: n 5 6, i 5 10%. Beginning of the Lease (January 1, 2016) Sans Serif (Lessee) Right-of-use asset (present value of lease payments) ........................ 479,079 Lease payable (present value of lease payments) ......................... 479,079 First LeaseCorp (Lessor: no profit on the “sale”) First LeaseCorp accounts for this Type A lease the same way it recorded a direct financing lease in the main chapter:38 Lease receivable (present value of lease payments) .......................... 479,079 Inventory of equipment (lessor’s cost: book value) ...................... 479,079 CompuDec (Lessor: profit on the “sale”) If Sans Serif had leased the equipment directly from CompuDec, which had produced it at a cost of $300,000, CompuDec would account for this Type A lease the same way it recorded a sales-type lease in the main chapter:39 Illustration 15–24 Type A Lease: Lessee Attains Risk and Rewards of Ownership (continued) Using Excel, enter: 5 PV(.10,6,100000,1) Output: 479079 Using a calculator: enter: BEG mode N 6 I 10 PMT –100000 FV Output: PV 479079
Spiceland_Inter_Accounting8e_Ch15
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