risks and rewards, 1. to the acquisition of an asset on credit by the lessee, and 2. to a sale or financing by the lessor
1. lessee acquires the economic benefits of the use of the asset for a major part of its economic life in return for an obligation (fair value + finance charge)
2. if not reflected in financial statements, economic resources and obligations are understated
1. an agreement whereby
2. the lessor conveys to the lessee
3. in return for a payment
4. the right to use an asset
5. for an agreed period of time
one party (the lessor), another party (the lessee)
lease, executory contract
assets with physical substance
1. right for use of minerals, oil and gas
2. right for use of films, recordings, patents and copywrights
lessees, lessors, operating lease, finance lease, inception
the lease agreement, the date of commitment by the parties
substantially all the risks and rewards, ownership of an asset
substantially all the risks and rewards, ownership
1. Unsatisfaction about performance
2. Veroudering
3. Idle capacity
4. Decline in residual value
5. Uninsured damage
1. Any benefits obtained from using the asset
2. Appreciation in residual value
1. Ownership transfers by the end of the lease term
2. Option to purchase the asset for a low amount at the end of the lease contract
3. Lease term is for the major part of economic life time
4. At the date of inception, the present value of the minimum lease payments is approx the same as all the fair value of the leased asset
5. Highly special product, only the lessee can use the asset without major modification
1. Cancellation fees of the lease are paid by the lessee
2. Fluctuations in fair value of the asset belong to the lessee
3. Continue the lease for a second period that is lower than the market price
1. the ownership transfers to the lessee, or
2. the lessee will exercies the option to buy the underlying asset
1. transfering of ownership to the lessee by the end of lease term
2. lessee is reasonably certain to exercise an option to purchase the asset
3. lease transfers substantially all the risk and rewards incidental to ownership of the asset
1. The non cancellable period
2. for which the lease contract applies
3. whereby the lessee has the option to continue the lease
4. when at the inception of the lease
5. it is reasonably certain that the lesse will exercise that option
1. Unforseen costs will apply to the cancellation
2. Cancalletion only possible only with the permission of the lessor
3. Lessee is committed to enter into a new lease for the same asset and lessor by cancellation
4. The penalty of cancellation is higher than cancellation itself
1. The option is priced far below market price
2. Fair value of the asset has improved
3. The asset is very specialised for the lessee and changing the lease is very expensive
1. Period the asset is economically usable
2. Number of production units obtained from the asset
1. FV of the leased asset (market price)
2. Minimum lease payments for each period
3. Discount rate
Payments over the lease term
+ Guaranteed residual value
+ Bargain purchase option
- Contingent rent
- Reimbursement of costs paid by the lessor
total of all amounts payable under the lease contract
part of the residual value of the leased asset guaranteed by the lessee
unguaranteed
residual value guarantees, related party of the lessee, third-party financially able to settle the guarantee
Purchasing the asset at the end of the lease for a pre-set amount significantly less than the expected residual value
contingent rent
1. charge for using the asset
2. charge to reimburse operating expenses (executory costs)
1. The minimum lease payments, and
2. The unguaranteed residual value
1. The fair value of the leased asset, and
2. Any initial direct costs of the lessor
incremental borrowing rate
fair value, present value of the minimum lease payments
the amount recognised as an asset
the lease term
its economic life
interest expense incurred, the minimum lease payments received
an expense of the period in which it is earned
its statement of financial position, receivable, the net investment in the lease
1. the minimum lease payments receivable by the lessor, and
2. any unguaranteed residual value accuring to the lessor
revenue, incurred, principal
revenue in the period it is earned
1. profit or loss for the sale of the asset
2. Finance income over the lease term
initial entry to recognise profit or loss, treatment of initial direct costs
recognise selling profit of loss
is the selling profit or loss
the fair value of the asset, minimum lease payments
cost or carrying amount of the leased proporty, the present value,
an expense
an expense on a straight line basis over the lease term
income on a straight line basis
another systematic basis is more presentative of the time pattern
to the carrying amount of the lease asset, an expense over the lease term
the net consideration
cost and benefit, rental income and rental expense
arrangement that involves the sale of an asset that is then lease back from the purchaser
generate immediate cash flows while still retaining use of the asset
deferred and amortised over the lease term, income
the sale price of the asset, the asset's fair value