FAR Leases
When a lease transfers substantially all of the ... incidental to ownership to the lessee, that lease is in substance equivalent (2)
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
The mandatory recognition of the asset/liability relating to a finance lease is justified by two arguments in IAS 17:
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
IAS 17 define a lease as (5)
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
The key feature of a lease is the existence of an asset owned by ... but used by ...
one party (the lessor), another party (the lessee)
Service agreements relating to the provision of services, such as cleaning or maintenance, are not registered as... and therefore this is an ...
lease, executory contract
The lease standard is generally only applied to ...
assets with physical substance
IAS 17 excludes the following types of lease arrangements from its scope:
1. right for use of minerals, oil and gas
2. right for use of films, recordings, patents and copywrights
IAS 17 requires both ... and ... to classify each lease arrangement as either an ... or a ... and to make this classification at the ... of the lease
lessees, lessors, operating lease, finance lease, inception
Inception is defined as the earlier of the date of ... and ...
the lease agreement, the date of commitment by the parties
A finance lease is defined as a lease that transfers ... incidental to ...
substantially all the risks and rewards, ownership of an asset
The key criterion of a finance lease is the transfer of ... without a transfer of
substantially all the risks and rewards, ownership
The risks of ownership include (5)
1. Unsatisfaction about performance
2. Veroudering
3. Idle capacity
4. Decline in residual value
5. Uninsured damage
The rewards of ownership:
1. Any benefits obtained from using the asset
2. Appreciation in residual value
Examples of situations that would normally lead to financial lease (5)
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
Examples of situations that would normally lead to financial lease 2.0 (3)
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
A financial lease is very sure when (2)
1. the ownership transfers to the lessee, or
2. the lessee will exercies the option to buy the underlying asset
when classifying leases, examine three main conditions of the lease agreement (3)
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
The lease term is defined as:
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
non-cancellable lease characteristics (4):
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
Circumstances in which an option to extend a lease is reasonably certain (3)
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
IAS 17 defines an asset's economic life as (2)
1. Period the asset is economically usable
2. Number of production units obtained from the asset
The following information must all be determined at the inception of the lease
1. FV of the leased asset (market price)
2. Minimum lease payments for each period
3. Discount rate
Minimum lease payments is the total amount of
Payments over the lease term
+ Guaranteed residual value
+ Bargain purchase option
- Contingent rent
- Reimbursement of costs paid by the lessor
2.1 Payments over the lease term
total of all amounts payable under the lease contract
2.2 Guaranteed residual value
part of the residual value of the leased asset guaranteed by the lessee
If the guarantee is provided by a party related to the lessor rather than the lessee, that part of the residual value is regarded, for the purposes of IAS 17, as
unguaranteed
Lessors include in minimum lease payments ... by the lessee, a ... or a ...
residual value guarantees, related party of the lessee, third-party financially able to settle the guarantee
2.3 Bargain purchase option definition
Purchasing the asset at the end of the lease for a pre-set amount significantly less than the expected residual value
2.4 Additional payments arising from changes and occurence of events specified in the agreement are called
contingent rent
2.5 Payments under a lease may include two components:
1. charge for using the asset
2. charge to reimburse operating expenses (executory costs)
The discount rate that causes the aggregate present value of (2) ... to be equal to the sum of (2) ...
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
When the interest rate can not be determined the ... is used to discount lease payments
incremental borrowing rate
The lessee recognizes an asset or liability with ... or, if lower, ...
fair value, present value of the minimum lease payments
If the lessee incurs initial direct costs associated with negotiating and securing the lease arrangement, these costs are added to...
the amount recognised as an asset
If the asset is to be returned to the lessor, then its useful life is ...
the lease term
If ownership is reasonably certain to transfer to the lessee, then its useful life is ...
its economic life
Because lease payments are made over the lease term, the lease liability is increased by ... and decreased by ...
interest expense incurred, the minimum lease payments received
Contingent rent must be recognised as ...
an expense of the period in which it is earned
IAS 17 requires the lessor to recognise an asset held under a finance lease in ... and present it as a ... at an amount equal to
its statement of financial position, receivable, the net investment in the lease
The net investment in the lease is defined as the total of (2)
1. the minimum lease payments receivable by the lessor, and
2. any unguaranteed residual value accuring to the lessor
Receipts for executory costs are recorded as ... in the
same period in which the related expenses are ... , when the lessor is acting as ...
revenue, incurred, principal
When these receipts meet the definition of income in the Conceptual Framework, contingent rent is recognized as ...
revenue in the period it is earned
When dealers offer customers the choise the of either bying or leasing an asset, a lease arrangement gives rise to two types of income:
1. profit or loss for the sale of the asset
2. Finance income over the lease term
Accounting for the lease is identical to that required by non-dealer lessors except for an ... and the ...
initial entry to recognise profit or loss, treatment of initial direct costs
IAS 17 requires dealer lessors to ... at the beginning ot the lease, in accordance with the policy for sales
recognise selling profit of loss
Sales revenue less cost of sales expense ...
is the selling profit or loss
Sales revenue recognised is equal to ... or, if lower, the
the fair value of the asset, minimum lease payments
Cost of sales expense is the ... less ... of any guaranteed residual
cost or carrying amount of the leased proporty, the present value,
The initial direct costs incurred by the dealer for arranging the lease are recognized as ...
an expense
The operating lease payments are recognised by the lessee as ...
an expense on a straight line basis over the lease term
The operating lease payments are recognised by the lessor as ...
income on a straight line basis
Operational lease finances are not recognised on a straight line basis when ...
another systematic basis is more presentative of the time pattern
Any initial direct costs incurred by non-dealer lessors in negotiating operating leases are added ... and recognised as
to the carrying amount of the lease asset, an expense over the lease term
The Standard Interpretations Committee requires that all incentives associated with an operating lease are part of ... agreed for the use of the leased asset
the net consideration
The aggregate ... and ... of the incentives is treated as a reduction in ... and ...
cost and benefit, rental income and rental expense
A sale and leaseback is an ...
arrangement that involves the sale of an asset that is then lease back from the purchaser
Entities enter into sale and leaseback arrangements to ...
generate immediate cash flows while still retaining use of the asset
If a sale and lease back transaction results in a finance lease, excess of proceeds over the carrying amount is ... and thus not seen as ...
deferred and amortised over the lease term, income
The accounting treatment of the gain or loss on sale from an operational leaseback is determined by the relationship between ... and ...
the sale price of the asset, the asset's fair value