Chapter 21 - Accounting for leases. In this chapter students will be able to: Explain the nature, economic substance, and advantages of lease transactions; describe the accounting criteria and procedures for capitalizing leases by the lessee; contrast the operating and capitalization methods of recording leases.
21-1 PREVIEW OF CHAPTER 21 Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 21-2 21 Accounting for Leases LEARNING OBJECTIVES After studying this chapter, you should be able to: Explain the nature, economic substance, and advantages of lease transactions Describe the accounting criteria and procedures for capitalizing leases by the lessee Contrast the operating and capitalization methods of recording leases Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor 21-3 Describe the lessor’s accounting for directfinancing leases Identify special features of lease arrangements that cause unique accounting problems Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting Describe the lessor’s accounting for sales type leases List the disclosure requirements for leases THE LEASING ENVIRONMENT Who Are the Players? A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time Largest group of leased equipment involves: uInformation technology equipment uTransportation (trucks, aircraft, rail) uConstruction uAgriculture 21-4 LO 1 ILLUSTRATION 212 What Do Companies Lease? 21-5 THE LEASING ENVIRONMENT Who Are the Players? Banks Independents ► Credit Suisse ► CNH Capital (CHE) (NLD) (for CNH Global), ► Chase (USA) ► BMW Financial ► Barclays (GBR) ► Deutsche Bank (DEU) Captive Leasing Companies 30% Services (DEU) (for BMW) ► IBM Global Financing (USA) (for IBM) 44% 21-6 Market Share 26% LO 1 THE LEASING ENVIRONMENT Advantages of Leasing 100% financing at fixed rates. Protection against obsolescence Flexibility Less costly financing Tax advantages 21-7 OFFBALANCESHEET FINANCING Offbalancesheet financing LO 1 THE LEASING ENVIRONMENT Conceptual Nature of a Lease Capitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is noncancelable Leases that do not transfer substantially all the benefits and risks of ownership are operating leases 21-8 LO 1 21 Accounting for Leases LEARNING OBJECTIVES After studying this chapter, you should be able to: Explain the nature, economic substance, and advantages of lease transactions Describe the lessor’s accounting for directfinancing leases Describe the accounting criteria and procedures for capitalizing leases by the lessee Identify special features of lease arrangements that cause unique accounting problems Contrast the operating and capitalization methods of recording leases Describe the effect of residual values, guaranteed and unguaranteed, on lease accounting Explain the advantages and economics of leasing to lessors and identify the classifications of leases for the lessor 21-9 Describe the lessor’s accounting for sales type leases List the disclosure requirements for leases ACCOUNTING BY THE LESSEE If the lessee capitalizes a lease, the lessee records an asset and a liability generally equal to the present value of the rental payments uRecords depreciation on the leased asset uTreats the lease payments as consisting of interest and principal ILLUSTRATION 212 Journal Entries for Capitalized Lease 21-10 LO 2 APPENDIX 21A EXAMPLES OF LEASE ARRANGEMENTS ILLUSTRATION 21A3 Comparative Entries for Finance Lease—Bargain Purchase Option 21-94 LO 10 APPENDIX 21A 21-95 EXAMPLES OF LEASE ARRANGEMENTS LO 10 APPENDIX 21A EXAMPLES OF LEASE ARRANGEMENTS ILLUSTRATION 21A4 Comparative Entries for Finance Lease 21-96 LO 10 APPENDIX 21A 21-97 EXAMPLES OF LEASE ARRANGEMENTS LO 10 APPENDIX 21A EXAMPLES OF LEASE ARRANGEMENTS ILLUSTRATION 21A5 Comparative Entries for Operating Lease 21-98 LO 10 APPENDIX 21B SALELEASEBACKS The term saleleaseback describes a transaction in which the owner of the property (sellerlessee) sells the property to another and simultaneously leases it back from the new owner Advantages: 21-99 Financing Taxes LO 11 Describe the lessee’s accounting for saleleaseback transactions APPENDIX 21A SALELEASEBACKS DETERMINING ASSET USE To the extent the sellerlessee continues to use the asset after the sale, the saleleaseback is really a form of financing. u Lessor should not recognize a gain or loss on the transaction. If the sellerlessee gives up the right to the use of the asset, the transaction is in substance a sale. u Gain or loss recognition is appropriate 21-100 LO 11 APPENDIX 21A SALELEASEBACKS Lessee If the lease meets one of the four criteria for treatment as a finance lease, the sellerlessee should u Account for the transaction as a sale and the lease as a finance lease. u Defer any profit or loss it experiences from the sale of the assets that are leased back under a finance lease u Amortize profit over the lease term 21-101 LO 11 APPENDIX 21A SALELEASEBACKS Lessee If none of the finance lease criteria are satisfied, the seller lessee accounts for the transaction as a sale and the lease as an operating lease. uLessee defers such profit or loss and amortizes it in proportion to the rental payments over the period when it expects to use the assets 21-102 LO 11 APPENDIX 21A SALELEASEBACKS Lessor If the lease meets one of the lease capitalization criteria, the purchaserlessor records the transaction as a purchase and a directfinancing lease. If the lease does not meet the criteria, the purchaserlessor records the transaction as a purchase and an operating lease 21-103 LO 11 APPENDIX 21A SALELEASEBACKS SALELEASEBACK EXAMPLE Japan Airlines (JAL) on January 1, 2015, sells a used Boeing 757 having a carrying amount on its books of $75,500,000 to CitiCapital for $80,000,000 JAL immediately leases the aircraft back under the following conditions: The term of the lease is 15 years, non-cancelable, and requires equal rental payments of $10,487,443 at the beginning of each year The aircraft has a fair value of $80,000,000 on January 1, 2015, and an estimated economic life of 15 years JAL pays all executory costs JAL depreciates similar aircraft that it owns on a straight-line basis over 15 years 21-104 The annual payments assure the lessor a 12 percent return JAL’s incremental borrowing rate is 12 percent LO 11 APPENDIX 21A SALELEASEBACKS SALELEASEBACK EXAMPLE This lease is a finance lease to JAL because the lease term is equal to the estimated life of the aircraft and because the present value of the lease payments is equal to the fair value of the aircraft to CitiCapital. CitiCapital should classify this lease as a direct financing lease 21-105 LO 11 APPENDIX 21A 21-106 SALELEASEBACKS LO 11 APPENDIX 21A 21-107 SALELEASEBACKS LO 11 COPYRIGHT Copyright © 2015 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 21-108 ...PREVIEW OF CHAPTER 21 Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 2 1- 2 21 Accounting for Leases LEARNING OBJECTIVES After studying this chapter, you should be able to:... 23,981.62 Cash 2 1- 24 25,981.62 LO 2 ACCOUNTING BY THE LESSEE 2 1- 25 ILLUSTRATION 2 1- 6 Lease Amortization Schedule for Lessee— Annuity-Due Basis LO 2 ACCOUNTING BY THE LESSEE ILLUSTRATION 21 6 Lease Amortization... Depreciation and the discharge of the obligation are independent accounting processes 2 1- 20 LO 2 ACCOUNTING BY THE LESSEE 2 1- 21 Illustration: CNH Capital (NLD) (a subsidiary of CNH Global) and Ivanhoe Mines