Ch 18 - Leases Pt 2

Front 1

Lessor’s gross method Lease Receivable

Back 1

undercounted sum of all value lessor expects to receive, including annuity payments, BPO and RV (guaranteed or not) - gross method

Front 2

Lessor’s unearned interest revenue

Back 2

difference between gross lease receivable above and the PV (gross lease receivable). PV (lessor’s lease receivable) must approximately equal the FMV of the asset at the lease inception date, due to economic rationality

Front 3

Lessor’s sales revenue (sales-type lease only)

Back 3

the PV (lessor’s Minimum Lease Payments)

Front 4

Lessors COGS (sales-type lease only)

Back 4

lessor’s NBV of the lease asset, minus the PV (unguaranteed RV)

Front 5

Lessor’s interest rate

Back 5

lessor always uses his rate

Front 6

Lessee’s interest rate

Back 6

lessee uses the lesser of lessor and lessee rates

Front 7

Lesse’s lease liability

Back 7

always the PV (lessee’s minimum lease payments)

Front 8

Executory Costs

Back 8

expenses of ownership such as maintenance, property taxes and insurance.

Front 9

How do you account for executory costs

Back 9

Account for these as period expenses

Front 10

What if lessor pays executory costs and then adds them to the lease payments charged to the lessee

Back 10

the lessee has to exclude them (and expense them) when computing the periodic payments to be capitalized

Front 11

Initial Direct Costs

Back 11

such as legal fees, credit investigations, commissions, etc that are incurred by the lessor. These may affect both lessor and lessee accounting.

Front 12

IDC, Operating lease

Back 12

these costs should be capitalized by the lessor (“Deferred Lease costs”) and amortized over the lease term usually S-L.

Front 13

IDC, Direct financing lease

Back 13

lessor must pass these costs on to the lessee. This means that the lease payment the lessor calculates will include these costs.

Front 14

IDC, Sales-type lease

Back 14

lessor expenses initial direct costs as selling expenses in the period in which the lease is signed.

Front 15

How will new rules affect IDCs?

Back 15

Will stay the same

Front 16

lease disclosures

Back 16

On the b/s, long term lease payable/receivable must be split into current/noncurrent portions (also true for bonds payable) Two ways - a. Recognize decline in lease payable/receivable over the coming year as the current portion b. Recognize the PV(next year’s payment) as the current portion.

Front 17

Footnote disclosures include the following items

Back 17

1) Payment amounts over the next five years, whether operating or capital, and whether contingent (depending on some specific event) or sublease 2) Payment terms and restricitons, such as existence of BPOs and renewal clauses. 3) Gross amount of assets under lease by major function. 4) Rental expense (if operating) 5) Lessor must disclose executory costs, unguaranteed residual value, and unearned interest revenue

Front 18

What is unearned interest revenue

Back 18

UIR is difference between goodies lessor thinks he’s going to get and PV of those amounts

Front 19

Sale and Leaseback Arrangements (may change with new rule)

Back 19

The buyer/ lessor basically buys an annuity from the seller/lessee. This also resembles making a loan to seller/lessee; buyer/lessor transfers large cash amount to seller/lessee, and is paid back over years with interest.

Front 20

What’s a potential benefit of SLB arrangement for buyer/lessor

Back 20

depreciation deductions (ie tax benefits), if the lease is operating

Front 21

Tax Incentives of SLB arrangement

Back 21

1) Seller/lessee deducts lease payments (or interest expense), gets a big cash payment, and may be out from under previous financing. 2) Buyer/lessor receives investment tax credit, accelerated depreciation deductions, and interest revenue for financing the deal 3) In short, the seller/lessee sells an annuity plus (maybe) depreciation tax deductions to the buyer/lessor; in return, seller/lessee gets a big cash payment, a gain/loss to amortize into income, and (maybe) new depreciation deductions. Seller/lessee continues to use the asset.

Front 22

buyer/lessor accounting for sale/leaseback

Back 22

the accounting isn’t weird. Asset value when you lease it back is the amount you bought it for, not FMV. Can’t account for this as a sales type lease - can be direct financing or operating 1. Record purchasing an asset 2. Record leasing it out (not a sales type lease)

Front 23

seller/lessee, sale/leaseback

Back 23

Tax law is set to keep seller/lessee from escalating rent or depreciation costs.

Front 24

What does seller/lessee do with the gain or loss on the sale if operating lease

Back 24

defer and amortize the g/l in proportion to each year’s rent expense (ie, S-L)

Front 25

What does seller lessee do with gain or loss if capital lease

Back 25

defer and amortize the g/l in the same proportion as the leased asset’s depreciation rate

Front 26

When can you recognize loss immediately

Back 26

when loss is less than “maximum allowable loss” you can book everything less than max allowable loss, defer the rest

Front 27

Max allowable loss

Back 27

book value - FMV

Front 28

When can some of the gain be taken right away on a SLB?

Back 28

“Minor leaseback.” When total gain > PV(payments) you can take a portion of the gain right away and defer the rest