Accounting Lease Essay

2346 words - 10 pages

Accounting for Leases
Source: Solutions Manual t/a Australian Financial Accounting 7/e by Craig Deegan

11.1 Within AASB 117 a lease is defined as:
an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

11.2 We should capitalise a lease transaction (meaning that the leased asset and lease liability will be placed on the statement of financial position) when substantially all the risks and rewards of ownership pass to the lessee, and the lease payments are deemed to be material. AASB 117 describes the risks and rewards of ownership as follows:
Risks include the possibilities of ...view middle of the document...

11. Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are:
(a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee;
(b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example, in the form of a rent rebate equalling most of the sales proceeds at the end of the lease); and
(c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.
12. The examples and indicators in paragraphs 10 and 11 are not always conclusive. If it is clear from other features of the lease that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease. For example, this may be the case if ownership of the asset transfers at the end of the lease for a variable payment equal to its then fair value, or if there are contingent rents, as a result of which the lessee does not have substantially all such risks and rewards.

11.3 If the lease is considered to be a finance lease (also referred to as a capital lease or a financial lease), the amount to be initially capitalised by the lessee for the asset and liability is the fair value of the leased property, or if lower, the present value of the minimum lease payments as determined at the inception of the lease.
Minimum lease payments are defined at paragraph 4 of AASB 117 as:
The payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:
(a) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or
(b) for a lessor, any residual value guaranteed to the lessor by:
(i) the lessee;
(ii) a party related to the lessee; or
(iii) a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.
However, if the lessee has an 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, the minimum lease payments comprise the minimum payments payable over the lease term to the expected date of exercise of this purchase option and the payment required to exercise it.
As the last part of the above requirement indicates, for a lessee, the minimum lease payments include any bargain purchase option, even though the lessee might not be contractually obliged to exercise the option to buy the asset.
The discount rate to be used in computing the present value of the minimum lease payments (and hence, the amount to be included in the statement of financial position for the leased asset and lease liability...

Other Papers Like Accounting Lease

Chapter 23.10 Essay

993 words - 4 pages Lani on January 1, 2006, was one of eight equal annual payments. At the inception of the lease, the criteria established for classification as a capital lease by the lessee were met. Required:    1. What is the theoretical basis for the accounting standard that requires certain long-term leases to be capitalized by the lessee? Do not discuss the specific criteria for classifying a specific lease as a capital lease. When a lease

Fasb Lease Practices Essay

802 words - 4 pages Memo To: Supervisor From: Samantha Papa Date: November 21, 2011 Subject: FASB Lease Practices and Client Recommendation I have researched and analyzed the different Financial Accounting Standards Board (FASB) practices related to lease options, which our trucking client may want to consider in his or her new business opportunity. Leases are a way in which companies can finance a business project. According to the official FASB website

11-6: Lessee, Ltd

533 words - 3 pages 1. Was the junior accountant’s analysis correct? The junior accountant used these GAAP standards for lease accounting. This is evident based on his statement, “Since the equipment reverts back to Lessor Inc., it is an operating lease.” (Deloitte, 2010) However, this company is an established British Company which means that it applies IFRS rules and regulations for preparing their financial statements. Under the IFRS standards, the company

Acc 422 Week 5 Reflection

364 words - 2 pages operating lease is one that meets none of the criteria. A capital lease is an example of accrual accounting's inclusion of economic events. Generally, companies have a choice of which type of lease they wish to use for accounting purposes, however, both types of leases provide specific advantages and disadvantages to financial statements. For example, companies wishing to show a higher return on asset ratios would choose an operating lease, as the

Benefits of Leasing

1202 words - 5 pages presented, a rental expense must be disclosed for all operating leases as well as a general description of the leasing arrangements. For those with noncancelable lease terms longer than one year, the lessee must report the future minimum payments for each of the next five years. Future Changes in Accounting for Leases Operating leases accounted for off the balance sheet with limited information disclosed in the notes has been a concern and

Warren Buffet

1302 words - 6 pages at the end of its life cycle at the firm. This is important because if the company owns the asset it will wish to sell off the asset when the company no longer wishes to utilize it to generate positive cash flow to the company. 2. Once a company decides to lease, there are a number of different ways a lease may be classified for accounting purposes. Identify and describe the different classifications, including (1) how to determine the

Client Memo

736 words - 3 pages the fair value of the leased item (FASB Accounting Standards Codification, 2013). In addition to meeting at least one of the four capital lease criteria, to be a direct financing or sales type lease, both of the following criteria must be met as well. There must not be any significant uncertainties surrounding the amount of un-reimbursable costs that are expected to be incurred under the lease, and the collectability of the lease payments is

Accounting 202 Tb

2089 words - 9 pages ownership occur during the first 75% of an asset's life.  True    False   3. In accounting for operating leases, the lessor, rather than the lessee, will recognize depreciation on the leased asset.  True    False   4. In addition to the criteria that must be met by the lessee, the lessor must meet additional conditions for classification as a nonoperating lease to satisfy the realization principle.  True    False  5. When accounting

Accounting For Leases – Financial Versus Operational Leases - Impacts On Financial Statements And On Financial Analysis

877 words - 4 pages Course: Financial Accounting Theme 1: "Accounting for leases – Financial versus Operational Leases impacts on financial statements and on financial analysis." "Accounting for leases – Financial versus Operational Leases - impacts on financial statements and on financial analysis" A lease is a contractual agreement between two parties for the hire of an asset. The lessee – user of the asset – will pay a lease rent to the lessor

Apc 311 Assignment

626 words - 3 pages crane cost $1,800,000 and has a 20-year useful life with no residual value. Required (a) Explain why Grey Plc believes this lease should be categorised as an operating lease. You should refer to relevant international accounting standards to distinguish between finance lease and operating lease agreements. (10%) (b) Show the required accounting treatment(s) in the records of Grey Plc, the lessor, including the income statement; the accruals

Bonne Sante Case

714 words - 3 pages determine lease payments. The judgment lies with a new location that Bonne Sante might open. Management needs to take into consideration that the fair value approach fluctuates based on traffic and the popularity of the location. For a more stable approach management might want to consider the cost model method in determining the amounts. 4) The new ED proposed lessor accounting would make lessor prefer the derecognition approach because the

Related Essays

Accounting For Lease Essay

2518 words - 11 pages This paper will outline 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

Response To Client Paper

637 words - 3 pages I would like to thank you for the opportunity to discuss with you lease options for your company. There are three options we would like to introduce and will, based on the information given and researched, make a recommendation for your company. There are three lease types we wish to present to you: Direct Financing, Sales-type lease, and operating lease. The Financial Accounting Standards Board has set rules, regulations and criteria that

Case Write Up Essay

647 words - 3 pages Date: 4/14/2012 From: Liang Haoxuan, Lin juan, Lin ying, Li qi To: Professor Chen Re: The 2nd case STARBUCKS Brief: The case includes some proposals from the IFRS about the lease accounting and a response from the Starbucks in which the Starbucks expressed its negative attitude and its reasons why it oppose those proposals. Then, in this write-up, our group is going to analysis the influence of leases and lease accounting on Starbucks

Client Response 1 Essay

991 words - 4 pages opportunity. This opportunity would require 120 trailers, which is 20 trailers more than the trucking company owns. Regional Trucking Company is uncertain how long its relationship with this client would last, but knows this opportunity presents a potential for significant growth for the company. In researching the lease options available that Regional Trucking Company may consider as identified on the Financial Accounting Standards (FASB) Board