922 SECTION 3 Financial Instruments and Liabilities Type B Leases: Risks and Rewards of Ownership Not Transferred In many lease agreements, the lessor retains the usual risks and rewards of ownership and merely “rents” the asset to the lessee for a period of time. We consider these arrangements to be Type B leases. In the previous illustration, the lease term is equal to the expected useful life of the asset (six years). Now, in Illustration 15–25 , we apply the right-of-use model to another situation ( Illustration 15–5 in the main chapter) in which the lease term is only four years of the asset’s six-year life. We’ll assume that the shorter lease term indicates that the risks and rewards of ownership have been retained by the lessor, so the arrangement is classified as a Type B lease. Lessee accounting for this situation under the proposed ASU is a significant departure from current GAAP. Under current GAAP, this lease would be considered an “operating lease” because none of the four criteria for capital lease classification is met, and thus no asset or liability would be recorded at the beginning of the lease. Instead, as we saw in the main chapter, we would simply record lease payments as lease expense on a straight-line basis over the lease term. Under the new lease guidance, though, Sans Serif is deemed to have purchased the right to use the asset for four years of the asset’s six-year useful life and records a “right-of-use asset” as well as a liability to pay for that right. So, just as for our prior example in which the asset was leased for its entire life, Sans Serif still recognizes a right-of-use asset and lease liability. The only difference is that, because the lease includes fewer payments, a smaller present value is recorded at the beginning of the lease. GAAP Change The notion of operating leases is eliminated. $100,000 3 3.48685* 5 $348,685 Lease Payments Lessor’s cost RECORDING LEASE EXPENSE / LEASE REVENUE In a Type B lease, the lessee reports lease expense on a straight-line basis and the lessor reports lease revenue on a straight-line basis over the lease term. That’s because in a Type B lease, the risks and rewards of ownership are deemed not to have been transferred to the lessee, so we view the arrangement as essentially a rental agreement. Consistent with that perspective, the lessee and the lessor will report straight-line rental of $100,000 during each of the four years. However, while the lessor’s lease revenue is simply the $100,000 lease payment each year, the lessee has two lease-related expenses— interest expense on its lease 43This is like we recorded an operating lease in the main chapter. See Illustration 15–5A. In a Type B lease, both the lessee and lessor record total lease expense (lessee) and lease revenue (lessor) on a straight-line basis. On January 1, 2016, Sans Serif Publishers leased printing equipment from First LeaseCorp. First LeaseCorp purchased the equipment from CompuDec Corporation at a cost of $479,079. Sans Serif’s borrowing rate for similar transactions is 10%. The lease agreement specifies four annual payments of $100,000 beginning January 1, 2016, the beginning of the lease, and at each December 31 thereafter through 2018. The useful life of the equipment is estimated to be six years, but the lessee will use the asset only until the end of 2019. The present value of those four payments at a discount rate of 10% is $348,685: *Present value of an annuity due of $1: n 5 4, i 5 10%. Beginning of the Lease (January 1, 2016) Sans Serif (Lessee) Right-of-use asset (present value of lease payments) .......................... 348,685 Lease payable (present value of lease payments) ........................... 348,685 First LeaseCorp (Lessor) No entry to record receivable or to derecognize (remove from the balance sheet) the asset 43 Illustration 15–25 Type B Lease: Lessee Does Not Attain Risk and Rewards of Ownership The lessee acquires an asset—the right to use the equipment—and records a liability to pay for it. The lessor records no lease receivable.
Spiceland_Inter_Accounting8e_Ch15
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