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Initial Direct Costs_ change in lease term_ lesse and lessor example

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Initial Direct Costs_ change in lease term_ lesse and lessor example Powered By Docstoc
					                                                                                                                                Prepared by Teresa Gordon


Example 8 (loosely based on Example 8 in 2009 Preliminary Views Document)
Assumptions                                                                                   APPENDIX B IN MY COMMENT LETTER
• Primary non-cancellable lease period — five years
• Secondary optional period — three years at same rate per year
• Annual rentals — CU 1,000, paid in arrears
• Lessee’s incremental borrowing rate over the entire lease period — 10 percent
• Rate the lessor charges the lessee over the entire lease period -- 10 percent
• Lessor and lessee split the fee paid to attorney to draw up the lease agreement (CU 200 each)
• For initial measurement, (a) the lease obligation is measured at the present value of the
lease payments over the expected lease term using the lessee’s incremental borrowing
rate and (b) the right-of-use asset is equal to the obligation plus initial direct costs
• For subsequent measurement, (a) the obligation is amortised using the effective
interest method over the expected lease term and (b) the right-of-use asset is
depreciated on a straight-line basis over the expected lease term.
• The lessee is neither required nor permitted to exercise the renewal option until the
end of the five-year period. However, there is a CU 500 penalty for nonrenewal.
Most likely lease term is reassessed at start of year 4.
• On exercise of the option, the lessee will recognise the present value of the remaining
lease payments as the revised lease obligation and adjust the right-of-use
asset.
Lessor's book value at inception =       4,000.00 useful life=          10 years
Most likely lease term at inception
Variation a                        5 years
Variation b                        8 years
          For derecognition method, residual value is CU 2,000 if lease ends in 5 years
          For derecognition method, residual value is CU 1,000 if lease ends in 8 years

Present values for examples (payments in arrears - ordinary annuity)
 Lease                               Future         Present
                        Annual        Value          Value
Term in Interest rate
                       Payment (nonrenew            (before
 Years
                                    penalty) Initial Direct
      5          10%        1,000           500         4,101
      8          10%        1,000             0         5,335




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                              Facts for variations PV Ex 8                                          Page 1 of 24
                                                                                                                                                      Prepared by Teresa Gordon


Lessee Table for 5 yr term            Variation A                      Lessor Table for 5 yr term               Initial direct costs =         200

 Period    Payment        Interest      Principal     Balance           Period     Payment          Interest         Principal           Balance
   0                            10%                   4,101.25             0          (4,301)           8.26%                            4,301.25
   1        1,000.00         410.12        589.88     3,511.37             1        1,000.00           355.45               644.55       3,656.70
   2        1,000.00         351.14        648.86     2,862.51             2        1,000.00           302.19               697.81       2,958.89
   3        1,000.00         286.25        713.75     2,148.76             3        1,000.00           244.52               755.48       2,203.41
   4        1,000.00         214.88        785.12     1,363.64             4        1,000.00           182.09               817.91       1,385.50
   5        1,500.00         136.36      1,363.64         0.00             5        1,500.00           114.50             1,385.50           (0.00)
Totals      5,500.00       1,398.75      4,101.25                      Totals       5,500.00         1,198.75             4,301.25

Lessee Table for 8 yr term            Variation B                      Lessor Table for 8 yr term               Initial direct costs =         200

 Period    Payment        Interest      Principal     Balance           Period     Payment          Interest         Principal           Balance
   0                            10%                   5,334.93             0          (5,535)           9.00%                            5,534.93
   1        1,000.00         533.49        466.51     4,868.42             1        1,000.00           498.11               501.89       5,033.04
   2        1,000.00         486.84        513.16     4,355.26             2        1,000.00           452.95               547.05       4,485.99
   3        1,000.00         435.53        564.47     3,790.79             3        1,000.00           403.72               596.28       3,889.70
   4        1,000.00         379.08        620.92     3,169.87             4        1,000.00           350.05               649.95       3,239.76
   5        1,000.00         316.99        683.01     2,486.85             5        1,000.00           291.56               708.44       2,531.32
   6        1,000.00         248.69        751.31     1,735.54             6        1,000.00           227.81               772.19       1,759.12
   7        1,000.00         173.55        826.45       909.09             7        1,000.00           158.31               841.69         917.44
   8        1,000.00          90.91        909.09         0.00             8        1,000.00            82.56               917.44           (0.00)
Totals      8,000.00       2,665.07      5,334.93                      Totals       8,000.00         2,465.07             5,534.93




                                    Initial direct costs =
Original Amortization Table for Lessee                           200




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                              Facts for variations PV Ex 8                                                                Page 2 of 24
                                                                                                                 Prepared by Teresa Gordon



                                                       Adj for   Balanc
 Period    Payment        Interest      Principal     Renewal      e                  Comparative Example PV8b
   0                            10%                               ####
   1        1,000.00         410.12        589.88                 ####
   2        1,000.00         351.14        648.86                 ####
   3        1,000.00         286.25        713.75                 ####
   4        1,000.00         214.88        785.12                 ####
   5        1,500.00         136.36      1,363.64                 0.00
Totals      5,500.00       1,398.75      4,101.25

                                    Initial direct costs =
Original Amortization Table for Lessor                              200

                                                       Adj for   Balanc
 Period    Payment        Interest      Principal     Renewal       e
   0                          8.26%                                ####
   1        1,000.00         355.45        644.55                  ####
   2        1,000.00         302.19        697.81                  ####
   3        1,000.00         244.52        755.48                  ####
   4        1,000.00         182.09        817.91                  ####
   5        1,500.00         114.50      1,385.50                 (0.00)
Totals      5,500.00       1,198.75      4,301.25




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                                  Facts for variations PV Ex 8                       Page 3 of 24
                                                                                                                                        Prepared by Teresa Gordon


Based on Example 8 in the 2009 Preliminary Views document                                                                                Lessee Table for 8 yr term
Assumptions                     Most likely lease term at inception = 5 years                                                             Period     Payment
• Primary non-cancellable lease period — five years                                                                                          0
• Secondary optional period — three years at same rate per year                                                                              1         1,000.00
• Annual rentals — CU 1,000, paid in arrears                                                                                                 2         1,000.00
• Lessee’s incremental borrowing rate over the entire lease period — 10 percent                                                              3         1,000.00
• Rate the lessor charges the lessee over the entire lease period -- 10 percent                                                              4         1,000.00
• Lessor and lessee split the fee paid to attorney to draw up the lease agreement (CU 200 each)                                              5         1,000.00
• For initial measurement, (a) the lease obligation is measured at the present value of the                                                  6         1,000.00
lease payments over the expected lease term using the lessee’s incremental borrowing                                                         7         1,000.00
rate and (b) the right-of-use asset is equal to the obligation.                                                                              8         1,000.00
• For subsequent measurement, (a) the obligation is amortised using the effective                                                        Totals        8,000.00
interest method over the expected lease term and (b) the right-of-use asset is
depreciated on a straight-line basis over the expected lease term.
• The lessee is neither required nor permitted to exercise the renewal option until the
end of the five-year period. However, there is a CU 500 penalty for nonrenewal.
Most likely lease term is reassessed at start of year 4 and renewal is most likely
• On exercise of the option, the lessee will recognise the present value of the remaining
lease payments as the revised lease obligation and adjust the right-of-use
asset.                          For derecognition method, residual value is CU 2,000

Present values for example:        years            rate           payment   future value        Type=0
PV of original term                        5               10%          1000           500           4,101
PV of revised term                         8               10%          1000             0           5,335

Original Amortization Table for Lessee         Initial direct costs =                    200                                             Lessee Table for 5 yr term
                                                                     Adj for
    Period        Payment         Interest         Principal        Renewal       Balance                    Comparative Example PV8a     Period     Payment
       0                                 10%                                       4,101.25                                                  0
       1            1,000.00          410.12          589.88                       3,511.37                                                  1        1,000.00
       2            1,000.00          351.14          648.86                       2,862.51                                                  2        1,000.00
       3            1,000.00          286.25          713.75                       2,148.76                                                  3        1,000.00
       4            1,000.00          214.88          785.12                       1,363.64                                                  4        1,000.00
       5            1,500.00          136.36        1,363.64                           0.00                                                  5        1,500.00
Totals              5,500.00        1,398.75        4,101.25                                                                             Totals       5,500.00

Original Amortization Table for Lessor         Initial direct costs =                    200



ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                                Based on PV Ex 8a (LT longer)                                                 Page 4 of 24
                                                                                                                                      Prepared by Teresa Gordon


                                                               Adj for
    Period        Payment          Interest     Principal     Renewal          Balance
       0                                8.26%                                   4,301.25
       1            1,000.00           355.45      644.55                       3,656.70
       2            1,000.00           302.19      697.81                       2,958.89
       3            1,000.00           244.52      755.48                       2,203.41
       4            1,000.00           182.09      817.91                       1,385.50
       5            1,500.00           114.50    1,385.50                           (0.00)
Totals              5,500.00         1,198.75    4,301.25
Lessor's book value at inception =               4,000.00 useful life=                10 years
                                                                              Performance obligation
Comparative Example PV8a                                                             method               Derecognition method
                                                         Lessee                      Lessor                      Lessor
                                                 debit            credit       debit         credit        debit         credit
At inception of lease:
Right of use asset                               4,301.25
Liability/Receivable for Lease Payments                           4,101.25      4,301.25                   4,301.25
Lease liability (lessor)                                                                       4,101.25
Cash (initial direct cost)                                          200.00                       200.00                    200.00
Plant, property & equipment                                                                                              4,000.00
Cost of goods sold                                                                                         2,000.00                 0.5
Equipment held for lease (residual value)                                                                  2,000.00                 0.5
Lease revenue (PVELP)                                                                                                    4,101.25
                                                 4,301.25         4,301.25      4,301.25       4,301.25    8,301.25      8,301.25

                                                                              Performance obligation
Comparative Example PV8a                                                             method               Derecognition method
                                                         Lessee                      Lessor                      Lessor
End of Year 1 - payment is made:                 debit            credit       debit         credit        debit         credit
Cash                                                              1,000.00     1,000.00                    1,000.00
Lease obligation/receivable                        589.88                                      644.55                      644.55
Interest expense/revenue                           410.12                                      355.45                      355.45

Lease liability               (SL method)                                         820.25
Lease revenue                                                                                    820.25

Amort/Depreciation expense                         860.25                         400.00



ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                             Based on PV Ex 8a (LT longer)                                                Page 5 of 24
                                                                                                                    Prepared by Teresa Gordon


Accumulated amort/depreciation                           860.25                      400.00
(SL method)                                 1,860.25   1,860.25     2,220.25       2,220.25   1,000.00   1,000.00




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                 Based on PV Ex 8a (LT longer)                                          Page 6 of 24
                                                                                                                                  Prepared by Teresa Gordon


                                                                         Performance obligation
                                                                                                     Derecognition method
Comparative Example PV8a                                                        method
                                                    Lessee                      Lessor                      Lessor
End of Year 2 - payment is made:            debit            credit       debit         credit        debit        credit
Cash                                                         1,000.00     1,000.00                    1,000.00
Lease obligation/receivable                  648.86                                       697.81                     697.81
Interest expense/revenue                     351.14                                       302.19                     302.19

Lease liability             (SL method)                                      820.25
Lease revenue                                                                               820.25

Amort/Depreciation expense (SL method)       860.25                          400.00
Accumulated amort/depreciation                                 860.25                       400.00
                                            1,860.25         1,860.25      2,220.25       2,220.25    1,000.00         1,000.00

                                                                         Performance obligation
                                                                                                     Derecognition method
Comparative Example PV8a                                                        method
                                                    Lessee                      Lessor                        Lessor
                                            debit            credit       debit         credit        debit            credit
End of Year 3 - payment is made:
Cash                                                         1,000.00      1,000.00                   1,000.00
Lease obligation/receivable                  713.75                                         755.48                       755.48
Interest expense/revenue                     286.25                                         244.52                       244.52

Lease liability             (SL method)                                      820.25
Lease revenue                                                                               820.25

Amort/Depreciation expense (SL method)       860.25                          400.00
Accumulated amort/depreciation                                 860.25                       400.00
                                            1,860.25         1,860.25      2,220.25       2,220.25    1,000.00         1,000.00




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                        Based on PV Ex 8a (LT longer)                                                 Page 7 of 24
                                                                                                                                       Prepared by Teresa Gordon


Beginning of Year 4 - lease term is re-evaluated and renewal is the most likely outcome.
Revised Amortization Table for Lessee          Initial direct costs =                  200
                                                                     Adj for                                                Before
    Period        Payment          Interest        Principal        Renewal      Balance                  Should now be   Adjustment
       0                                  10%                                     4,101.25
       1            1,000.00           410.12          589.88                     3,511.37
       2            1,000.00           351.14          648.86                     2,862.51
       3            1,000.00           286.25          713.75        (1,642.03)   3,790.79                    3,790.79      2,148.76
       4            1,000.00           379.08          620.92                     3,169.87
       5            1,000.00           316.99          683.01                     2,486.85
       6            1,000.00           248.69          751.31                     1,735.54
       7            1,000.00           173.55          826.45                       909.09
       8            1,000.00            90.91          909.09                         0.00
Totals              8,000.00         2,256.73        5,743.27

Revised Amortization Table for Lessor        Initial direct costs =                    200
                                                                   Adj for                                                  Before
    Period        Payment          Interest      Principal        Renewal       Balance          Rate     Should now be   Adjustment
       0                       various                                           4,301.25           8.26%
       1            1,000.00           355.45          644.55                    3,656.70           8.26%
       2            1,000.00           302.19          697.81                    2,958.89           8.26%
       3            1,000.00           244.52          755.48   (1,686.29)       3,889.70           8.26%     3,889.70      2,203.41
       4            1,000.00           350.05          649.95                    3,239.76           9.00%
       5            1,000.00           291.56          708.44                    2,531.32           9.00%
       6            1,000.00           227.81          772.19                    1,759.12           9.00%
       7            1,000.00           158.31          841.69                      917.44           9.00%
       8            1,000.00            82.56          917.44                        (0.00)         9.00%
Totals              8,000.00         1,543.78        3,456.22
Note that 8.26% no longer sets present value equal to cash flows.
After the change to 8 years, the implicit rate is 9%




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                              Based on PV Ex 8a (LT longer)                                                Page 8 of 24
                                                                                                                                            Prepared by Teresa Gordon


                                                                                Performance obligation
Comparative Example PV8a                                                                method               Derecognition method
                                                           Lessee                Lessor                             Lessor
                                                    debit           credit        debit        credit         debit         credit
Beginning of Year 4 - revising of most likely lease term:
Right-to-use asset                                  1,642.03
Lease obligation/receivable                                         1,642.03      1,686.29                    1,686.29
Lease liability (lessor)                                                                         1,686.29
Lease revenue                                                                                                                 843.15      0.5
Equipment held for lease (residual value)                                                                                     843.15      0.5
                                                    1,642.03        1,642.03      1,686.29       1,686.29     1,686.29     1,686.29
New balance in right to use/lease liability         3,362.53                                     3,326.79     1,156.85 held for lease
Remaining years to amortize                                 5                                            5

                                                                                Performance obligation
                                                                                                             Derecognition method
                                                                                       method
                                                           Lessee                      Lessor                         Lessor
                                                   debit            credit       debit         credit         debit            credit
End of Year 4 - payment is made:
Cash                                                                1,000.00      1,000.00                    1,000.00
Lease obligation/receivable                          620.92                                        649.95                        649.95
Interest expense/revenue                             379.08                                        350.05                        350.05

Lease liability               (SL method)                                           665.36
Lease revenue                                                                                      665.36

Amort/Depreciation expense (SL method)               672.51                         400.00
Accumulated amort/depreciation                                        672.51                       400.00
                                                   1,672.51         1,672.51      2,065.36       2,065.36     1,000.00         1,000.00




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                               Based on PV Ex 8a (LT longer)                                                    Page 9 of 24
                                                                                                                                  Prepared by Teresa Gordon


                                                                         Performance obligation
                                                                                                     Derecognition method
Comparative Example PV8a                                                        method
                                                    Lessee                      Lessor                        Lessor
                                            debit            credit       debit         credit        debit            credit
End of Year 5 - payment is made:
Cash                                                         1,000.00      1,000.00                   1,000.00
Lease obligation/receivable                  683.01                                         708.44                       708.44
Interest expense/revenue                     316.99                                         291.56                       291.56

Lease liability             (SL method)                                      665.36
Lease revenue                                                                               665.36

Amort/Depreciation expense (SL method)       672.51                          400.00
Accumulated amort/depreciation                                 672.51                       400.00
                                            1,672.51         1,672.51      2,065.36       2,065.36    1,000.00         1,000.00

                                                                         Performance obligation
                                                                                                     Derecognition method
                                                                                method
                                                    Lessee                      Lessor                        Lessor
                                            debit            credit       debit         credit        debit            credit
End of Year 6 - payment is made:
Cash                                                         1,000.00      1,000.00                   1,000.00
Lease obligation/receivable                  751.31                                         772.19                       772.19
Interest expense/revenue                     248.69                                         227.81                       227.81

Lease liability             (SL method)                                      665.36
Lease revenue                                                                               665.36

Amort/Depreciation expense (SL method)       672.51                          400.00
Accumulated amort/depreciation                                 672.51                       400.00
                                            1,672.51         1,672.51      2,065.36       2,065.36    1,000.00         1,000.00




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                        Based on PV Ex 8a (LT longer)                                                Page 10 of 24
                                                                                                                                       Prepared by Teresa Gordon


                                                                             Performance obligation
                                                                                                         Derecognition method
Comparative Example PV8a                                                            method
                                                        Lessee                      Lessor                         Lessor
                                                debit            credit       debit         credit         debit            credit
End of Year 7 - payment is made:
Cash                                                             1,000.00      1,000.00                    1,000.00
Lease obligation/receivable                      826.45                                         841.69                        841.69
Interest expense/revenue                         173.55                                         158.31                        158.31

Lease liability               (SL method)                                        665.36
Lease revenue                                                                                   665.36

Amort/Depreciation expense (SL method)           672.51                          400.00
Accumulated amort/depreciation                                     672.51                       400.00
                                                1,672.51         1,672.51      2,065.36       2,065.36     1,000.00         1,000.00

                                                                             Performance obligation
                                                                                                         Derecognition method
                                                                                    method
                                                        Lessee                      Lessor                         Lessor
                                                debit            credit       debit         credit         debit            credit
End of Year 8 - payment is made:
Cash                                                             1,000.00      1,000.00                    1,000.00
Lease obligation/receivable                      909.09                                         917.44                        917.44
Interest expense/revenue                          90.91                                          82.56                         82.56

Lease liability               (SL method)                                        665.36
Lease revenue                                                                                   665.36

Amort/Depreciation expense (SL method)           672.51                          400.00
Accumulated amort/depreciation                                     672.51                       400.00

Equipment held for lease (residual value)                                                                                   1,156.85
Plant, property and equipment                                                                              1,156.85
                                                1,672.51         1,672.51      2,065.36       2,065.36     2,156.85         2,156.85
          -
                                                                                             Both Lessor Methods
                            Lessee T-accounts



ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                            Based on PV Ex 8a (LT longer)                                                 Page 11 of 24
                                                                                                                        Prepared by Teresa Gordon


   Right to Use Asset (net)                  Liability for lease payments                   Lease payments receivable
     4,301.25                                                      4,101.25                    4,301.25
                      860.25                        589.88                                                     644.55
                      860.25                        648.86                                                     697.81
                      860.25                        713.75                                                     755.48
     1,642.03                                                      1,642.03                    1,686.29
                      672.51                        620.92                                                     649.95
                      672.51                        683.01                                                     708.44
                      672.51                        751.31                                                     772.19
                      672.51                        826.45                                                     841.69
                      672.51                        909.09                                                     917.44
     5,943.27       5,943.27                     5,743.27          5,743.27                    5,987.54      5,987.54
                    TRUE                                          TRUE                                       TRUE
           -
                  Lessor-Performance Obligation Method
     Book value of PP&E                              Lease liability                      Book value of asset using
     4,000.00                                                      4,101.25               performance obligation
                      400.00                        820.25                                method =             800.00
                      400.00                        820.25
                      400.00                        820.25                                Residual value under the
                      400.00                                       1,686.29               derecogntion method =
                      400.00                        665.36                                                   1,156.85
                      400.00                        665.36
                      400.00                        665.36
                      400.00                        665.36
                                                    665.36
     4,000.00       3,200.00                     5,787.54          5,787.54
                      800.00                                      TRUE




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                             Based on PV Ex 8a (LT longer)                                 Page 12 of 24
                                                                                                                                  Prepared by Teresa Gordon


le for 8 yr term                                         Lessor Table for 8 yr term           Initial direct costs =    200
                   Interest    Principal   Balance        Period     Payment        Interest     Principal        Balance
                         10%                5,334.93         0            (5,535)       9.00%                      5,534.93
                      533.49      466.51    4,868.42         1         1,000.00        498.11        501.89        5,033.04
                      486.84      513.16    4,355.26         2         1,000.00        452.95        547.05        4,485.99
                      435.53      564.47    3,790.79         3         1,000.00        403.72        596.28        3,889.70
                      379.08      620.92    3,169.87         4         1,000.00        350.05        649.95        3,239.76
                      316.99      683.01    2,486.85         5         1,000.00        291.56        708.44        2,531.32
                      248.69      751.31    1,735.54         6         1,000.00        227.81        772.19        1,759.12
                      173.55      826.45      909.09         7         1,000.00        158.31        841.69          917.44
                       90.91      909.09        0.00         8         1,000.00         82.56        917.44           (0.00)
                    2,665.07    5,334.93                 Totals        8,000.00      2,465.07      5,534.93




le for 5 yr term                                         Lessor Table for 5 yr term               Initial direct costs =   200

                   Interest    Principal   Balance        Period     Payment          Interest       Principal       Balance
                         10%                4,101.25         0          (4,301)           8.26%                       4,301.25
                      410.12      589.88    3,511.37         1        1,000.00           355.45         644.55        3,656.70
                      351.14      648.86    2,862.51         2        1,000.00           302.19         697.81        2,958.89
                      286.25      713.75    2,148.76         3        1,000.00           244.52         755.48        2,203.41
                      214.88      785.12    1,363.64         4        1,000.00           182.09         817.91        1,385.50
                      136.36    1,363.64        0.00         5        1,500.00           114.50       1,385.50           (0.00)
                    1,398.75    4,101.25                 Totals       5,500.00         1,198.75       4,301.25




             ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                        Based on PV Ex 8a (LT longer)                                   Page 13 of 24
                                                                            Prepared by Teresa Gordon




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx   Based on PV Ex 8a (LT longer)               Page 14 of 24
                                                                                                                                        Prepared by Teresa Gordon


Based on Example 8 in the 2009 Preliminary Views document                                                                                 IF WE HAD ONLY KNOWN LESSEE TAB

Assumptions                     Most likely lease term at inception = 8 years                                                                 Period
• Primary non-cancellable lease period — five years                                                                                              0
• Secondary optional period — three years at same rate per year                                                                                  1
• Annual rentals — CU 1,000, paid in arrears                                                                                                     2
• Lessee’s incremental borrowing rate over the entire lease period — 10 percent                                                                  3
• Rate the lessor charges the lessee over the entire lease period -- 10 percent                                                                  4
• Lessor and lessee split the fee paid to attorney to draw up the lease agreement (CU 200 each)                                                  5
• For initial measurement, (a) the lease obligation is measured at the present value of the                                               Totals
lease payments over the expected lease term using the lessee’s incremental borrowing
rate and (b) the right-of-use asset is equal to the obligation.
• For subsequent measurement, (a) the obligation is amortised using the effective                                                         IF WE HAD ONLY KNOW TABLE FOR LE
interest method over the expected lease term and (b) the right-of-use asset is                                                                Period
depreciated on a straight-line basis over the expected lease term.                                                                               0
• The lessee is neither required nor permitted to exercise the renewal option until the                                                          1
end of the five-year period. However, there is a CU 500 penalty for nonrenewal.                                                                  2
Most likely lease term is reassessed at start of year 4 and renewal is most likely                                                               3
• On exercise of the option, the lessee will recognise the present value of the remaining                                                        4
lease payments as the revised lease obligation and adjust the right-of-use                                                                       5
asset.                          For derecognition method, residual value is CU 1000                                                       Totals

Present values for example:       years             rate          payment   future value         Type=0
PV of revised term                         5               10%         1000           500         4,101.25
PV of original term                        8               10%         1000             0         5,334.93

Original Amortization Table for Lessee         Initial direct costs =                    200
                                                                     Adj for
    Period        Payment        Interest          Principal        Renewal       Balance                    Comparative Example PV8b
      0                                 10%                                        5,334.93
      1             1,000.00        533.49            466.51                       4,868.42
      2             1,000.00        486.84            513.16                       4,355.26
      3             1,000.00        435.53            564.47                       3,790.79
      4             1,000.00        379.08            620.92                       3,169.87
      5             1,000.00        316.99            683.01                       2,486.85
      6             1,000.00        248.69            751.31                       1,735.54
      7             1,000.00        173.55            826.45                         909.09
      8             1,000.00          90.91           909.09                           0.00


ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                                Based on PV Ex8b (LT shorter)                                                 Page 15 of 24
                                                                                                                                          Prepared by Teresa Gordon


Totals              8,000.00       2,665.07          5,334.93

Original Amortization Table for Lessor          Initial direct costs =                    200
                                                                      Adj for
    Period        Payment          Interest         Principal        Renewal       Balance
       0                                9.00%                                       5,534.93
       1            1,000.00           498.11          501.89                       5,033.04
       2            1,000.00           452.95          547.05                       4,485.99
       3            1,000.00           403.72          596.28                       3,889.70
       4            1,000.00           350.05          649.95                       3,239.76
       5            1,000.00           291.56          708.44                       2,531.32
       6            1,000.00           227.81          772.19                       1,759.12
       7            1,000.00           158.31          841.69                         917.44
       8            1,000.00            82.56          917.44                           (0.00)
Totals              8,000.00         2,465.07        5,534.93
Lessor's book value at inception =                   4,000.00 useful life=                 10 years




                                                                                   Performance obligation
Comparative Example PV8b                                                                  method              Derecognition method
                                                             Lessee                       Lessor                     Lessor
                                                     debit            credit        debit         credit       debit         credit
At inception of lease:
Right of use asset                                   5,534.93
Liability/Receivable for Lease Payments                               5,334.93      5,534.93                   5,534.93
Lease liability (lessor)                                                                           5,334.93
Cash                                                                    200.00                       200.00                    200.00
Plant, property & equipment                                                                                                  4,000.00
Cost of goods sold                                                                                             3,000.00                 0.75
Equipment held for lease (residual value)                                                                      1,000.00                 0.25
Lease revenue (PVELP)                                                                                                        5,334.93
                                                     5,534.93         5,534.93      5,534.93       5,534.93    9,534.93      9,534.93

                                                                                   Performance obligation
                                                                                          method              Derecognition method
                                                             Lessee                       Lessor                     Lessor



ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                                 Based on PV Ex8b (LT shorter)                                               Page 16 of 24
                                                                                                                    Prepared by Teresa Gordon


End of Year 1 - payment is made:            debit      credit       debit          credit     debit      credit
Cash                                                   1,000.00     1,000.00                  1,000.00
Lease obligation/receivable                  466.51                                  501.89                501.89
Interest expense/revenue                     533.49                                  498.11                498.11

Lease liability             (SL method)                               666.87
Lease revenue                                                                        666.87

Amort/Depreciation expense                   691.87                   400.00
Accumulated amort/depreciation                           691.87                      400.00
(SL method)                                 1,691.87   1,691.87     2,066.87       2,066.87   1,000.00   1,000.00




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                 Based on PV Ex8b (LT shorter)                                         Page 17 of 24
                                                                                                                                  Prepared by Teresa Gordon


                                                                          Performance obligation
                                                                                                     Derecognition method
Comparative Example PV8b                                                         method
                                                    Lessee                       Lessor                     Lessor
End of Year 2 - payment is made:            debit            credit        debit         credit       debit        credit
Cash                                                         1,000.00      1,000.00                   1,000.00
Lease obligation/receivable                  513.16                                        547.05                    547.05
Interest expense/revenue                     486.84                                        452.95                    452.95

Lease liability             (SL method)                                      666.87
Lease revenue                                                                               666.87

Amort/Depreciation expense (SL method)       691.87                          400.00
Accumulated amort/depreciation                                 691.87                       400.00
                                            1,691.87         1,691.87      2,066.87       2,066.87    1,000.00         1,000.00

                                                                          Performance obligation
                                                                                                     Derecognition method
                                                                                 method
                                                    Lessee                       Lessor                       Lessor
                                            debit            credit        debit         credit       debit            credit
End of Year 3 - payment is made:
Cash                                                         1,000.00      1,000.00                   1,000.00
Lease obligation/receivable                  564.47                                         596.28                       596.28
Interest expense/revenue                     435.53                                         403.72                       403.72

Lease liability             (SL method)                                      666.87
Lease revenue                                                                               666.87

Amort/Depreciation expense (SL method)       691.87                          400.00
Accumulated amort/depreciation                                 691.87                       400.00
                                            1,691.87         1,691.87      2,066.87       2,066.87    1,000.00         1,000.00




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                        Based on PV Ex8b (LT shorter)                                                Page 18 of 24
                                                                                                                                        Prepared by Teresa Gordon


Beginning of Year 4 - lease term is re-evaluated and termination at end of 5 years is the most likely outcome
Revised Amortization Table for Lessee          Initial direct costs =                    200                Comparative Example PV8b
                                                                     Adj for                                                Before
    Period        Payment          Interest        Principal        Renewal     Balance                     Should now be Adjustment
       0                                  10%                                     5,334.93
       1            1,000.00           533.49          466.51                     4,868.42
       2            1,000.00           486.84          513.16                     4,355.26
       3            1,000.00           435.53          564.47         1,642.03    2,148.76                      2,148.76     3,790.79
       4            1,000.00           214.88          785.12                     1,363.64
       5            1,500.00           136.36        1,363.64                          0.00
       6                  -              0.00            (0.00)                        0.00
       7                  -              0.00            (0.00)                        0.00
       8                  -              0.00            (0.00)                        0.00
Totals              5,500.00         1,807.10        3,692.90

Revised Amortization Table for Lessor        Initial direct costs =                    200
                                                                   Adj for                                                 Before
    Period        Payment          Interest      Principal        Renewal       Balance         Rate     Should now be   Adjustment
       0                       various                                           5,534.93          9.00%
       1            1,000.00           498.11          501.89                    5,033.04          9.00%
       2            1,000.00           452.95          547.05                    4,485.99          9.00%
       3            1,000.00           403.72          596.28     1,686.29       2,203.41          9.00%     2,203.41       3,889.70
       4            1,000.00           182.09          817.91                    1,385.50          8.26%
       5            1,500.00           114.50        1,385.50                        (0.00)        8.26%
       6                 -              (0.00)           0.00                        (0.00)        8.26%
       7                 -              (0.00)           0.00                        (0.00)        8.26%
       8                 -              (0.00)           0.00                        (0.00)        8.26%
Totals              5,500.00         1,651.36        3,848.64
Note that 9% no longer sets present value equal to cash flows.
After the change to 5 years, the implicit rate is 8.26%




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                              Based on PV Ex8b (LT shorter)                                                Page 19 of 24
                                                                                                                                            Prepared by Teresa Gordon


                                                                                 Performance obligation
Comparative Example PV8b                                                                 method              Derecognition method
                                                           Lessee                 Lessor                            Lessor
                                                    debit           credit         debit        credit        debit         credit
Beginning of Year 4 - revising of most likely lease term:
Right-to-use asset                                                  1,642.03
Lease obligation/receivable                         1,642.03                                     1,686.29                      1,686.29
Lease liability (lessor)                                                          1,686.29
Lease revenue                                                                                                 1,264.72            -       0.75
Equipment held for lease (residual value)                                                                       421.57            -       0.25
                                                    1,642.03        1,642.03      1,686.29       1,686.29     1,686.29     1,686.29
New balance in right to use/lease liability         1,817.30                                     1,648.04     1,421.57 held for lease
Remaining years to amortize                                 2                                            2

                                                                                 Performance obligation
                                                                                                             Derecognition method
                                                                                        method
                                                           Lessee                       Lessor                        Lessor
                                                   debit            credit        debit         credit        debit            credit
End of Year 4 - payment is made:
Cash                                                                1,000.00      1,000.00                    1,000.00
Lease obligation/receivable                          785.12                                        817.91                        817.91
Interest expense/revenue                             214.88                                        182.09                        182.09

Lease liability               (SL method)                                           824.02
Lease revenue                                                                                      824.02

Amort/Depreciation expense (SL method)               908.65                         400.00
Accumulated amort/depreciation                                        908.65                       400.00
                                                   1,908.65         1,908.65      2,224.02       2,224.02     1,000.00         1,000.00




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                               Based on PV Ex8b (LT shorter)                                                   Page 20 of 24
                                                                                                                                  Prepared by Teresa Gordon


                                                                          Performance obligation
                                                                                                     Derecognition method
Comparative Example PV8b                                                         method
                                                    Lessee                       Lessor                       Lessor
                                            debit            credit        debit         credit       debit            credit
End of Year 5 - payment is made:
Cash                                                         1,500.00      1,500.00                   1,500.00
Lease obligation/receivable                 1,363.64                                      1,385.50                     1,385.50
Interest expense/revenue                      136.36                                        114.50                       114.50

Lease liability               (SL method)                                    824.02
Lease revenue                                                                               824.02

Equipment held for lease (residual value)                                                                              1,421.57
Plant, property and equipment                                                                         1,421.57

Amort/Depreciation expense (SL method)       908.65                          400.00
Accumulated amort/depreciation                                 908.65                       400.00
                                            2,408.65         2,408.65      2,724.02       2,724.02    2,921.57         2,921.57




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                        Based on PV Ex8b (LT shorter)                                                Page 21 of 24
                                                                                                                          Prepared by Teresa Gordon


Comparative Example PV8b
                           Lessee T-accounts                                                   Both Lessor Methods
   Right to Use Asset (net)                    Liability for lease payments                  Lease payments receivable
     5,534.93                                                       5,334.93                    5,534.93
                      691.87                          466.51                                                    501.89
                      691.87                          513.16                                                    547.05
                      691.87                          564.47                                                    596.28
           -        1,642.03 adjustment            1,642.03              -                           -        1,686.29
                      908.65                          785.12                                                    817.91
                      908.65                       1,363.64                                                   1,385.50
                                                        (0.00)                                                    0.00
                                                        (0.00)                                                    0.00
                                                        (0.00)                                                    0.00
    5,534.93      5,534.93                         5,334.93         5,334.93                    5,534.93      5,534.93
                 TRUE                                               TRUE                                      TRUE
Comparative Example PV8b
               Lessor-Performance Obligation Method
   Book value of PP&E                            Lease liability                           Book value of asset using
   4,000.00                                                    5,334.93                    performance obligation
                    400.00                      666.87                                     method =            2,000.00
                    400.00                      666.87
                    400.00                      666.87                                     Residual value under the
                    400.00                    1,686.29              -                      derecogntion method =
                    400.00                      824.02                                                        1,421.57
                                                824.02




    4,000.00      2,000.00                        5,334.93        5,334.93
                  2,000.00                                        TRUE




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                              Based on PV Ex8b (LT shorter)                                  Page 22 of 24
                                                                                                            Prepared by Teresa Gordon


WE HAD ONLY KNOWN LESSEE TABLE
                                                         Adj for
             Payment      Interest       Principal      Renewal      Balance
                                10%                                   4,101.25
              1,000.00       410.12         589.88                    3,511.37
              1,000.00       351.14         648.86                    2,862.51
              1,000.00       286.25         713.75                    2,148.76
              1,000.00       214.88         785.12                    1,363.64
              1,500.00       136.36       1,363.64                        0.00
              5,500.00     1,398.75       4,101.25

                                      Initial direct costs =               200
WE HAD ONLY KNOW TABLE FOR LESSOR
            Payment      Interest        Principal             Adj   Balance
                (4,301)       8.26%                                   4,301.25
              1,000.00      355.45          644.55                    3,656.70
              1,000.00      302.19          697.81                    2,958.89
              1,000.00      244.52          755.48                    2,203.41
              1,000.00      182.09          817.91                    1,385.50
              1,500.00      114.50        1,385.50                       (0.00)
              5,500.00    1,198.75        4,301.25




          ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                         Based on PV Ex8b (LT shorter)               Page 23 of 24
                                                                                                                                                    Prepared by Teresa Gordon


Comparative Example PV8a                                                      Comparative Example PV8b
                                                   Both Lessor                                                                           Both Lessor
                                                                                             Lessee T-accounts
                                                    Methods                                                                               Methods
             Lessee T-accounts
Right to Use Asset         Liability for lease   Lease payments               Right to Use Asset             Liability for lease        Lease payments
       (net)                   payments             receivable                        (net)                      payments                  receivable
   4,301                               4,101      4,301                           5,535                                  5,335            5,535
              860              590                           645                              692                467                                 502
              860              649                           698                              692                513                                 547
              860              714                           755                              692                564                                 596
   1,642           adjustment          1,642      1,048                              -      1,642              1,642         -   adjustment        1,686
              673              621                           470                              909                785                                 818
              673              683                           547                              909              1,364                               1,386
              673              751                           636                  5,535 5,535                  5,335 5,335                5,535 5,535
              673              826                           739                        0 TRUE                       0 TRUE                    0 TRUE
              673              909                           860
   5,943 5,943               5,743 5,743          5,349 5,349
         0 TRUE                    0 TRUE              0 TRUE

  Lessor-Performance Obligation Method                                             Lessor-Performance Obligation Method
  Book value of
      PP&E                    Lease liability    Variation A                  Book value of PP&E                 Lease liability     Variation B
   4,000                               4,101      Book value of asset using      4,000                                    5,335       Book value of asset using
             400                820              performance obligation                      400                   667                performance obligation
             400                820              method = 800                                400                   667                method = 2,000
             400                820                                                          400                   667
                                       1,048     Residual value under the                    400                 1,686       -        Residual value under the
              400               538              derecogntion method =                       400                   824                derecogntion method =
              400               538                         1,476                4,000 2,000                     5,335 5,335                      1,422
              400               538                                                 -      2,000                      0 TRUE
              400               538
              400               538
   4,000    3,200             5,149 5,149
              800                  0 TRUE




ca9c99af-4ac5-47d6-a7a9-c33b46a53102.xlsx                                          T-accts                                                                        Page 24 of 24

				
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