...Lease Finance Lease Finance • Lease is contract between the owner of the asset (Lessor) and the user (Lessee) of the asset, wherein the Lessor gives the right to use the asset to the Lessee for a consideration (Lease Rentals) over an agreed period of time (Lease period or tenure). • At the end of the lease period, the leased asset reverts back to the Lessor, unless the lease is renewed for another term. • Leasing separates the ‘Ownership’ and ‘Usage’ of the asset as two separate economic activities. Leasing 2 Leasing, Hire Purchase, Instalment Sale • Leasing: – Lessor retains the Ownership of the asset & claims the benefit of Depreciation. – Lessee claims the Lease Rentals as tax-deductible expense. • Hire Purchase: – Ownership passes to the Hirer (user) on payment of the last Instalment (on payment of Capital & Interest) and takes benefit of Depreciation and tax-deductibility of the Interest component of the Hire charges. • Instalment Sale: – The legal ownership passes as soon as the 1st instalment is paid. The balance amount is treated as a secured loan and Interest portion is Tax-deductible Leasing 3 Basic Types of Lease • On the basis of the extent to which the risks and rewards incidental to the ownership of the leased assets lie with the Lessor or the Lessee, lease can be classified as: Finance Lease Operating Lease Leasing 4 Finance (or Capital) Lease • Non-cancellable for a specified period called the PRIMARY LEASE Period- usually 5-8 years. • Leased Asset...
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...Week 7- Leases An agreement whereby the lessor conveys to the lessee in return of a payment series the payments the right to use an asset for an agreed period of time. Step 1 Define a finance lease Lease Risks and rewards has the ownership being transferred Where ownership being risks and rewards Step 2: Discuss risks and rewards Risks: Insurance, maintenance, potential drop in residual value Rewards: use of assets, potential increase in residual value Who bears? Who enjoys? URV MLP MLP MLP Minimum lease payments All minimum payments required by the lessee to the lessor 1. Rental 2. GRV * Guaranteed residual value * The asset will buy the asset from the lessor 3. BPO * Bargain purchase option * Gives the right to lessee to buy the asset that lower than market value MLP = CI 1-11+In +(GRV+BPO1+in) URV * unguaranteed residual value 3 types of leases * Direct finance * Manufacture/ dealer * Sales & lease back Lessor 1. Initial recognition DR Lease receivable xx CR asset xx 2. Subsequent measurement Lease receivable = Pv (MCR) + PV( URV) 3. Subsequent measurement Lease schedule Lessee 1. Initial recognition (Sales & lease back) DR cash xx CR lease asset xx CR deferred gain (L) xx *Deferred gain needs to be amortized 2. record lease Dr increase...
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...the differences in accounting treatment of and criteria for determining whether leases should be accounted for as either a capital lease or an operating lease. I will be limiting my discussion to the accounting treatment of leases by the lessee. This paper will discuss the current accounting treatment for the two types of leases according to Canadian GAAP and will tie in elements of the conceptual framework to the treatment of leases from CICA handbook section 1000, followed by a discussion on accounting theories related to lease treatment, and finally current issues outlined in academic research concerning lease treatment by the lessee. Capital and Operating Leases There are two major classifications of leases. Capital leases and operational leases. A Capital lease is defined in the CICA handbook as “a lease that, from the point of view of the lessee, transfers substantially all the benefits and risks incident to ownership of property to the lessee” (CICA, 2010, Section 3065, ¶3). In order for a lease to be classified as a capital lease, the life of the lease must exceed 75% of the life of the leased item, there must be a transfer of ownership at the end of the lease or a bargain purchase option, and the present value of the lease payments must exceed 90% of the fair market value of the asset (Grossman, A., & Grossman, S., 2010). An operational lease is described by the CICA handbook as “a lease in which the lessor does not transfer substantially all the benefits and risks...
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...RyanAir Lease Strategies Classifying leases as operational or financial is a key accounting issue in the airline industry because of the high value of the leased assets. When classifying leases the IFRS principle “substance over form” should be the prime criteria to identify the type of lease. In 2012 EasyJet operated 214 aircrafts. 148 of them were owned, 55 were acquired under operating leases contracts and 11 under a finance leases. In its annual report EasyJet states that it targets a ratio of 70:30 of owned vs. leased aircrafts but the ratio is expected to fluctuate with the introduction of the next generation aircraft. EasyJet is the only company of the 3 selected that openly acknowledges asset valuation issues arising from operating leases and thus provides ROCE ratios with and without the operating leases included. Operating leases are capitalized at rate 7 times the annual lease rental. It is evident that inclusion of operating leases considerably lowers the ROCE (return on employed capital) ratio. Without the lease adjustments the ROCE ratio is 14.5% and with operating leases included , the ratio lowers to 11.3%. EasyJet’s lease strategy is more conservative that of its competitors and the management demonstrates grater prudence when employing leases. EasyJet is also determined on owning the majority of its aircrafts. On the other hand, Vueling relies totally on operating leases to support its aircraft fleet. In 2012 its lease expense...
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...OFF-BALANCE SHEET FINANCING 1 Leases: Off-Balance Sheet Financing and the Strive for Transparency Today Brian Edman A Senior Thesis submitted in partial fulfillment of the requirements for graduation in the Honors Program Liberty University Spring 2011 OFF-BALANCE SHEET FINANCING Acceptance of Senior Honors Thesis This Senior Honors Thesis is accepted in partial fulfillment of the requirements for graduation from the Honors Program of Liberty University. 2 ______________________________ Gene R. Sullivan, Ph.D. Thesis Chair ______________________________ James B. Shelton, Ph.D. Committee Member ______________________________ Stephen R. Bowers, Ph.D. Committee Member ______________________________ James Nutter, D.A. Honors Director ______________________________ Date OFF-BALANCE SHEET FINANCING Abstract In today’s world, leases appear far and wide; they are commonplace throughout the business and accounting frontiers. Accounting for leases, however, is not so clear cut. Since there are various ways to account for leases, many companies pick and choose which they feel best suits their situation, even when this sweeps dirt under the rug along 3 the way. The financial procedures for dealing with leases should entail benefits as well as limitations to ensure each company is fairly representing all of its financial information. Off-balance sheet financing is one of the hot topics in accounting for leases because of the implications it imposes...
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...CHAPTER 15 LEASES Overview In the previous chapter, we saw how companies account for their long-term debt. The focus of that discussion was bonds and notes. In this chapter we continue our discussion of debt, but we now turn our attention to liabilities arising in connection with leases. Leases that produce such debtor/creditor relationships are referred to as capital leases by the lessee and as either direct financing or sales-type leases by the lessor. We also will see that some leases do not produce debtor/creditor relationships, but instead are accounted for as lease agreements. These are designated operating leases. Learning Objectives 1. Identify and describe the operational, financial, and tax objectives that motivate leasing. 2. Explain why some leases constitute lease agreements and some represent purchases/sales accompanied by debt financing. 3. Explain the basis for each of the criteria and conditions used to classify leases. 4. Record all transactions associated with operating leases by both the lessor and lessee. 5. Describe and demonstrate how both the lessee and lessor account for a capital lease. 6. Describe and demonstrate how the lessor accounts for a sales-type lease. 7. Explain how lease accounting is affected by the residual value of a leased asset. 8. Describe the way a bargain purchase option affects lease accounting. 9. Explain the impact on lease accounting of executory costs, the discount rate, initial direct costs, and contingent...
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...CHAPTER 21 Accounting for Leases ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) | | |Brief Exercises | | | Concepts for | |Topics |Questions | |Exercises |Problems |Analysis | |*1. Rationale for leasing. |1, 2, 4 | | | |1, 2 | |*2. Lessees; classification |3, 5, 7, |1, 2, 3, |1, 2, 3, |1, 2, 3, 4, |1, 2, 3, | |of leases; accounting by lessees. |8, 14 |4, 5 |5, 7, 8, 11, 12, |6, 7, 8, 9, 11, 12,|4, 5, 6 | | | | |13, 14 |14, | | | | | | |15, 16 | | |*3. Disclosure of leases. |19 | | |2, 4, 5, |2, 3, 5 | | | | | |7, 8 | | |*4. Lessors; classification ...
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...Lease Financing Lease is a contract between the owner and the user of assets for a certain time period during which the second party uses an asset in exchange of making periodic rental payments to the first party without purchasing it. Under lease financing, the lessee regularly pays the fixed lease rent over a period of time at the beginning or at the end of a month, 3 months, 6 months or a year. At the end of the lease contract the asset reverts to the real owner. However, in case of long-term lease contracts, the lessee is generally given the option to buy the leased asset or renew the lease contract. The three major types of leases are the operating lease, financial/capital lease and the direct financing lease. The operating lease is a short-term lease contract where the lessor bears all operating and repairing costs of the asset and the lessee pays periodic rental payments to the lessor, and where the lease is cancelable, and there is no bargain purchase option. Financial/capital lease is a long-term lease contract where the lessee bears all operating, repairing and maintenance costs, and makes periodic rental payments to the lessor. The lease is not cancelable and the lessee has the option for bargain purchase or renewal of lease contract at the end of the original lease period. In a direct financing lease, the lessor leases the asset by manufacturing or by purchasing from the manufacturer to the lessee directly and the lessee makes regular rental payments to the lessor...
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...Provision 1 According to ASC 840-10-55-10, “amounts paid in consideration for a guarantee by an unrelated third party are executory costs and are not included in the lessee’s minimum lease payments.”2 The external legal counsel fee of $500,000 that Thurber paid to Stipe, Berry, Mills and Buck LLP in connection with negotiating the lease agreement are executory cost because they are all third parties that guarantee for the lease agreement. They are not involved in the lease term. Thurber will have to recognize these costs as expenses. However, the $1 million of legal fees paid to Goliath will be included in the minimum lease payment. Under ASC 840-10-25-6 (e), “fees that are paid by the lessee to the owners of the special-purpose entity for structuring the lease transaction. Such fees shall be included as part of minimum lease payments (but shall not be included in the fair value of the leased property) for purposes of applying the 90 percent test in paragraph 840-10-25-1(d).”1 Legal fees incurred by Goliath are considered as fees for structuring the lease transaction. Therefore, it should be included in minimum lease payment. Provision 2 If any of those conditions do not exist, then the maximum amount that the lessee could be required to pay under the default covenant shall be included in minimum lease payments for purposes of applying paragraph 840-10-25-1 (d).”1 Thurber will be in default under the credit arrangement if there is a “material adverse change” in its financial condition...
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...LEASE CASE Basic Concepts: 1. On January 1, 2013, Flying High Airlines leased a new airplane for a term of 10 years. The expected life of the airplane is 20 years. There are no rights to purchase the asset at the end of the term, no bargain purchase option, and no residual value guarantee. The lease stipulates that Flying High makes annual payments of $650,000 beginning at the end of the first year (December 31, 2013). Flying High has an incremental borrowing rate of 4.5% and the fair market value of the airplane on January 1, 2013 is $6,250,000 (for simplicity, assume the lessor’s implicit rate is greater than 4.5%). a. What journal entries related to the lease arrangement should be recorded during 2013 (assume Flying High’s fiscal year end is December 31). b. Identify any effects the lease arrangement and the associated reporting would have on the balance sheet, income statement, and statement of cash flows for 2013. c. What is the annual lease payment that results in a present value of minimum lease payments equal to 90% of the fair market value of the airplane ($6,250,000)? 2. Now assume that the lessor decided to require the lease payments at the beginning of the year as opposed to the end of the year. Also assume that the lease arrangement had a bargain purchase option under which the lessee could purchase the airplane at the end of the contract for $250,000. a. What journal entries related to the lease arrangement should be recorded during 2013. b. Identify any...
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...Introduction Unlike conventional economics which focuses on profit maximization, the Islamic economic system aims at the “study of human falah achieved by organising the resources of earth on the basis of cooperation and participation (Akram Khan, p.55).” In other words, the Islamic economic system aims at attaining Allah s.w.t’s pleasure, while pursuing economic activities within the boundaries of the Islamic shariah. The Islamic shariah puts a heavy importance on the well being of the community and social justice. Thus, this also means the prohibition of interest. The prohibition of interest is one of the main factors that put Islamic economics in distance with the conventional economics. Because of this difference in nature, Islamic Financial Institutions (IFIs) have different types of contracts as practiced by conventional financial institutions. One of the types of contracts entered by IFIs is the Ijarah contract. Ijarah contracts are also known as Islamic leasing. Basically, this study is done in order to understand more the nature of leasing according to Islamic principles, and at the same time, the differences of ijarah with conventional leasing. In addition, this study also aims to identify the types of ijarah practiced by IFIs in Malaysia and also to see how Malaysian IFIs disclosed their ijarah financing in comparison to their counterparts in Bahrain IFIs. This is because as one ummah, it is important to have a standardized standard that is Shariah compliant...
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...potential for growth. As requested, I have spent the past few days examining the current FASB standards on leases to determine what the best course of action for Schmoe Trucking would be. There are a number of options when it comes to leasing, and it is vital that each option is examines in order to determine the proper course of action. There are a few things about leases that must be looked at before determining how to proceed. Leases are broken down into two categories; operating leases and capital leases. A capital lease is one that meets certain criteria and capital leases can be broken into subcategories; sales type leases and direct financing leases. We will be looking at the differences between sales type leases, operating leases, and direct financing leases in relation to the proposed acquisition of additional trailers. The first step is to determine if a lease is an operating lease or a capital lease. A capital lease will meet at least one of the following criteria. SAFS No. 13 outlines the capital lease criteria to be as follows; transfer of ownership of the leased item upon completion of the lease period, a bargain option is included in the terms of the lease, the period of time covered by the lease is at least 75% of the expected economic life, unless the period falls within the final 25% of the expected economic life, or the present value of the lease payments is the equal to or exceeds 90% of the fair value of the leased item (FASB Accounting Standards Codification...
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...Merritt 7 PO Box 5116 Norwalk CT 06856-5116 Dear FASB Technical Director, Thank you for your time and efforts to compose the exposure draft on leases to improve the accuracy of financial reporting. As accountants in Boulder Leasing Corporation, we believe that the new accounting models for both lessee and lessor will increase the accuracy of financial reporting by recognizing leasing assets on lessee’s balance sheet and disclosing the value and risks related to residual assets of lessor. However, we show great concerns that the revised exposure draft may lead to potential misstatements of assets and liabilities and users’ difficulty of making decisions. Thus, we hope to elaborate our concerns on how the new exposure draft may influence the following aspects: IDENTIFYING A LEASE We believe that the proposed definition of a lease in the revised exposure draft will greatly eliminate the situations when lessees keep their large amount of operating leasing assets off balance sheet. This change will improve the accuracy of financial reporting by requiring both lessees and lessors to reveal the leased asset on financial statements. The information users can acquire a better understanding and transparency of the leasing transactions from both parties. But the more specific and complicated criteria of identifying a lease in the proposed exposure draft may cause negative impacts for users of the financial reporting. As the boards require more extensive reconciliations of...
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...Simulation Review Paper Patton-Fuller Health Care is a not-for-profit Community Hospital that has many different types of services. Some of the services that are provided within this hospital are: emergency medical care, physical therapy, radiology, cardiology, labor and delivery, and even surgery for everyone. The Cardiac Care Hospital is a very important part of the Patton-Fuller Hospital, within this paper analyzing the financial indicators that help with the decision making that help in both the weaknesses and strengths within the Cardiac Care Hospital (CCH). At the same time, I will also be evaluating the funding options for obtaining medical equipment, and also the funding strategies for the success or failure of capital expansion (Apollo Group, 2011). Within phase one, one of the simulations observed was the great impact was throughout the cost cutting measures. Some of the options that were given and even used were the reduction of staff, and making changes within skills that were being used. By cutting these two cost, may have seen to some as a bad thing, but in the end was something that needed to be done to help the organization and it did not leave the organization in a shortfall. Reducing the staff was a great option because it helped the organization reduce the costs of training that needed to be done. Reducing staff members also meant that the organization would have fewer salaries to pay, meaning more for other equipment that is needed. The other option...
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...Accounting for Leases under IFRS Lease classification A lease is an agreement between lessor and lessee, whereby the lessor passes to the lessee the right to use an asset for an agreed period of time in return for a payment or series of payments. Under IFRS IAS (17) Leases we recognize two types of leases, finance and operating: IAS 17, paragraph 8: “A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.” IFRS further, in paragraphs 10 and 11, provides examples and indicators that “individually or in combination” would serve as criteria to classify a lease as finance lease. IAS 17, paragraph 10: “Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; (c) the lease term is for the major part of the economic...
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