Slide 1Accounting for LeasesLearning ObjectivesTeresa’s Specific ObjectivesSlide 6Lease ContractsSlide 8Other Terms You Will LearnSlide 10Slide 11Slide 12Slide 13Accounting by LesseeSlide 15Slide 16Accounting by LessorIFRS FlowchartSlide 192Accounting for LeasesAccounting for LeasesChapter 21Intermediate Accounting12th EditionKieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa BarbaraIntroductory Lecture – Includes Flow Introductory Lecture – Includes Flow ChartsCharts31. Explain the nature, economic substance, and advantages of lease transactions.2. Describe the accounting criteria and procedures for capitalizing leases by the lessee.3. Contrast the operating and capitalization methods of recording leases.4. Identify the classifications of leases for the lessor.5. Describe the lessor’s accounting for direct-financing leases.6. Identify special features of lease arrangements that cause unique accounting problems.7. Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting.8. Describe the lessor’s accounting for sales-type leases.9. List the disclosure requirements for leases.Learning ObjectivesLearning Objectives4Teresa’s Specific ObjectivesTeresa’s Specific ObjectivesBe able to classify a lease from the perspective of lessor and lesseeBe able to prepare journal entries for lessor and lessee – for both operating and capital-type leasesBe able to research FARS to resolve complications not mentioned in text6The lease is a contractual agreement between the lessor and the lessee. The lease gives the lessee the right to use specific property.The lease specifies the duration of the lease and rental payments.The obligations for taxes, insurance, and maintenance may be assumed by the lessor or the lessee.7Lease ContractsLease ContractsCancellation ProvisionCancellation ProvisionSpecifies under whatcircumstances the leasemay be canceled.Lease TermLease TermDelineates the time period the lease is to be in force. May include renewal periods.Rental payment requiredover lease term – may include planned increases.Lease PaymentLease Payment8Lease ContractsLease ContractsResidual ValueResidual ValueWho is responsible for market value of leasedasset at end of lease term?Purchase OptionPurchase OptionGrants lessee the right topurchase the asset at the end of the lease term. The option price may or may not be a bargain.9Other Terms You Will LearnOther Terms You Will LearnContingent rentalsBargain renewal optionBargain purchase optionNonrenewal penaltyGuaranteed residual valueInterest rate implicit in the leaseUnguaranteed residual valueExecutory costsInitial direct costsMinimum lease paymentsIncremental borrowing rate101. 100% Financing at Fixed Rates. 2. Protection Against Obsolescence.3. Flexibility.4. Less Costly Financing.5. Tax Advantages.6. Off-Balance-Sheet Financing.The Leasing EnvironmentThe Leasing EnvironmentAdvantages of Leasing111. Interest Revenue.2. Tax Incentives.3. High Residual Value.4. Making a sale that would otherwise go to a competitor that provides a leasing optionThe Leasing EnvironmentThe Leasing EnvironmentBenefits to the Lessor12Operating Lease Capital LeaseJournal Entry: Rent expense xxx Cash xxxJournal Entry: Leased equipment xxx Lease obligation xxxThe issue of how to report leases is the case of substance versus form. Although technically legal title may not pass, the benefits from the use of the property do.Statement of Financial Accounting Standard No. 13, “Accounting for Leases,” 1980A lease that transfers substantially all of the benefits and risks of property ownership should be capitalized (only noncancellable leases may be capitalized).The Leasing EnvironmentThe Leasing EnvironmentLO 1 Explain the nature, economic substance, and advantages of lease transactions.13TransferofOwnershipBargain PurchaseLease Term>= 75%PV of Payments>= 90%Operat ing LeaseNoNoNoNoNoNoNoNoYesCapital LeaseLease AgreementYes Yes YesLeases that DO NOT meet any of the four criteria are accounted for as Operating Leases.Accounting by the LesseeAccounting by the Lessee14Lease AgreementIs there transferof ownership?Yes Is there a bargainpurchase option?Yes NoIs lease term equalto or greater than75% of economiclife ?Yes NoCapitalLeaseOperatingLeaseIs present valueof payments equal to or morethan 90% FMV?Yes No1111thth Ed Ed SlideSlideAccounting by LesseeAccounting by Lessee15Classification of Leases by the LessorAccounting by the LessorAccounting by the LessorA sales-type lease involves a manufacturer’s or dealer’s profit, and a direct-financing lease does not.Illustration 21-1116Classification of Leases by the LessorAccounting by the LessorAccounting by the LessorA lessor may classify a lease as an operating lease but the lessee may classify the same lease as a capital lease.Illustration 21-1217Lease AgreementDoes lease meet Group 1 criteria?No Is collectibility ofpayments assured?No yesIs lessor’s performancesubstantiallycomplete ?No yesOperatingLeaseDirectfinancingyesyesDoes asset FMVequal lessor’sbook value?No Sales typeAccounting by LessorAccounting by Lessor1111thth Ed Ed SlideSlideIFRS FLOWCHARTIFRS FLOWCHARTLater we’ll talk about International Financial Reporting Standards18From KPMG webcast Spring