Leases A comparison of US Generally Accepted Accounting Principles with by forsythe

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									Leases
A comparison of US Generally Accepted
Accounting Principles with International
Financial Reporting Standards
Presented by Julie Minton/April Stocks

   Much like these two,
    we are excited to tell
    you about our learning
    experience; albeit, you
    may derive more
    enjoyment out of
    watching the garage
    door go up and down.
US GAAP on Leases
   FAS 13 Accounting for Leases
   FAS 28 Accounting for Sales with
    Leasebacks
   FAS 98 Accounting for Leases: Sale-
    Leaseback Transactions Involving Real
    Estate; Sales-Type Leases of Real Estate;
    Definition of the Lease Term; Initial Direct
    Costs of Direct Financing Leases
US GAAP – FAS 13
   Addresses accounting for the lessee and lessor
   Defines a Capital Lease as one in which
    “substantially all the benefits and risks of
    ownership” of an asset are transferred to the lessee
    and is a noncancelable agreement
   Defines an Operating Lease as one not meeting the
    specific Capital Lease criteria
   Establishes specific criteria to determine the
    classification of a lease for both the lessee and lessor
IFRS on Leases
   IAS 17 Leases
   IAS 40 Investment Property
   SIC 27 Evaluating the Substance of
    Transactions in the Legal Form of a Lease
   IFRIC 4 Determining Whether an
    Arrangement Contains a Lease
IFRS - IAS 17
   Addresses accounting for the lessee and lessor
   Defines a Finance Lease as one in which
    “substantially all the risks and rewards
    incidental to ownership” of an asset are
    transferred to the lessee
   Defines an Operating Lease as all other leases
   General guidance provided as to the factors
    that indicate a finance lease
Comparison of Major Standards
   Both address the accounting for leases for two
    parties
       Lessee
       Lessor
   Both categorize leases in two groups
       Capital (GAAP) or Finance (IFRS) Lease
       Operating Lease
   GAAP applies specific criteria while IFRS gives
    general guidance on lease classification
Lease Classification
FAS 13 Capitalization Criteria - Lessee
   If lease meets any one of these Group 1
    criteria and is noncancelable – Lessee should
    classify as a Capital Lease
   Does title transfer?
   Is there a bargain purchase option?
   Is the lease term ≥ 75% of asset’s useful life?
   Is the present value of minimum lease
    payment ≥ 90% of asset’s fair market value?
FAS 13 Capitalization Criteria - Lessor
   If lease meets any one of Group I criteria and
    both Group II criteria – Lessor should classify
    as a Capital Lease
   Collectability of payments is reasonably
    predictable
   There are no important uncertainties in future
    costs by the lessor
IAS 17 Capitalization Factors
   Ownership transfer
   The option for the lessee to purchase on very
    favorable terms
   The lease term extends the major part of the asset’s
    life
   The present value of the minimum lease payments is
    at least substantially all of the assets fair value?
   The asset is specialized such that “only the lessee
    can use without major modification”
IAS 17 Capitalization Factors
   Note the incorporation of an additional factor
   If substance of lease transaction is deemed to
    transfer substantially all the risks/rewards
    incidental to ownership – Finance Lease
   All others – Operating Lease
   Lessee and Lessor use the same factors which
    generally creates a symmetrical treatment of
    lease
Comparison of Capitalization Criteria
   Both consider the transfer of the risks and rewards of
    ownership of the asset
   IFRS uses the same classification factors for both lessee and
    lessor
   GAAP focuses on meeting conditions of specific criteria
   While IFRS focuses on the substance of the lease transaction
    by listing factors that give indication of a finance lease
   IFRS does not establish quantitative breakpoints or bright
    lines
       75% of assets useful life
       90% of assets fair value
Accounting Treatment
Operating Lease
   US GAAP & IFRS
       Expense recognized by lessee, no asset booked
       Revenue and asset recognized by the lessor
       Lease incentives included over term of the lease
           Amortize Rent Expense for lessee
           Amortize Rental Income for lessor
Capital or Finance Lease - Lessee
   US GAAP & IFRS
       Recognition of an asset and liability
       Recognition at lower of PV of minimum lease
        payments or fair value of leased asset
       Initial Direct Costs included in asset recognized
       Interest expense (or finance costs) charged at a
        constant rate
Capital or Finance Lease - Lessor
   Receivable recognized at net investment
   PV of minimum lease payment and any
    unguaranteed residual value included in net
    investment
   Asset removed from the balance sheet
Differences

Lest you not get
bored …
there are substantial
differences in
accounting for leases
Capital or Finance Lease
   US GAAP                          IFRS
       Incremental borrowing            Implicit rate always
        rate used unless                  used unless unknown
        implicit rate known or
        lower

                                         Depreciate over shorter
       Depreciate over asset’s
                                          of useful life or lease
        life if title trfs or
                                          term unless title
        bargain purchase,
                                          transfers, then use asset
        otherwise use lease
                                          life
        term
Capital or Finance Lease
   US GAAP                           IFRS
       Sales-type lease profit           Sales-type lease profit
        recognition dependent              or loss recognized in
        upon guarantee of                  current period
        residual value

       No special provisions             Special provision
        for leases of investment           provided for leases of
        property                           investment property
Special Topics
Sale-Leaseback Leases
   US GAAP                          IFRS
       Defer gain/loss over             Gain/loss dependent on
        lease term unless                 lease classification
        leaseback is determined              Operating lease – full
        minor, PV < 10% of                    gain/loss recognition
        fair value                            unless artificial loss
                                              which is amortized over
                                              period
                                             Finance lease –
                                              amortize gain/loss
Real Estate Leases
   US GAAP                           IFRS
       Title transfer - lessor           Lessor of real estate
        recognizes income as a             recognizes income in
        sales type lease in                current period
        current period
       No title transfer -
        recognize over lease
        term as a direct finance
        lease type
Examples
Sale-type Lease
                            Adjusted for   At Inception:        GAAP          IFRS
                            PV Residual    COGS                $81,895      $85,000
                                           Lease Receivable    $100,000     $100,000
Dealer Cost      $85,000      $81,895        Sales Revenue     $96,895      $100,000
                                             Inventory         $85,000      $85,000
Unguaranteed
                  $5,000      $3,105                  Income Statement
Residual Value
                                                              GAAP          IFRS
Sales Revenue    $100,000     $96,895      Revenue           $96,895      $100,000
                                           COGS              $81,895      $85,000
Sales                                      Gross Profit      $15,000      $15,000
Price/Fair       $100,000
Value
Sale-Leaseback
Title does not transfer
No Bargain Purchase Option                    At Inception(lessee):      GAAP              IFRS

Lease Term 4yrs < 75% of useful life (6yrs)   Cash                    $5,000,000 Dr    $5,000,000 Dr
PV of Lease Pymt < 90% of FV ($5,000,000)        Asset                $3,000,000 Cr    $3,000,000 Cr

Noncancelable, annual lease                      Unearned Profit      $2,000,000 Cr
                                $1,100,000
payment                                          Profit from Sale                      $2,000,000 Cr
PV minimum lease payment
                                $3,486,852
(70% of FV)
                                                              Income Statement
Carrying Value                  $3,000,000                              GAAP             IFRS
                                               Expense
Lessor’s implicit rate             10%         Operating Lease $1,100,000             $1,100,000
                                               Realized Profit        $500,000        $2,000,000
Lessee incremental
                                   10%
borrowing rate
Multiple Choice Questions
Question 1
     Boxes Company sells their office building to Inter
     Corporation and leases it back. This transaction qualifies as
     an operating sales-leaseback lease. Under the different
     standards, how would the gain/loss be recognized in the
     period of sale/leaseback? Sales price and fair value are $1
     million, book value is $750,000.
     IFRS                     GAAP
A.   Defer/Amortize           Defer/Amorize
B.   Recognition Gain/Loss Recognition Gain/Loss
C.   Recognition Gain/Loss Defer/Amortize
D.   Defer/Amortize           Recognition Gain/Loss
     Answer: C
Question 2
     Zoe Mfg. leased equipment to All Good Co. in a
     sales-type lease with an unguaranteed residual value
     of $20,000. Under IFRS, how will Zoe recognize a
     profit?
A.   Profit recognized in current period
B.   Profit recognized over lease term
C.   Profit recognized at end of lease when residual
     value is determinable
D.   Profit recognized at point residual value is
     determined with certainty
     Answer: A
Question 3
     Which statement is False?
A.   Both FAS and IAS consider the transfer of
     ownership in determining the lease
     classification
B.   FAS focuses on specific criteria
C.   IAS focuses on the substance of the lease
D.   FAS avoids quantitative breakpoints
     Answer: D

								
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