LEASE ACCOUNTING FOR LESSOR Mommy said
STAY AT HOME
AND
STUDY HARD
Don’t Play Play
Ok?
Inception Date of Lease
Lease classification is made at the inception of the lease.
Finance Lease Opera-ng Lease What is “incep-on of the lease”? • The incep6on of the lease is the earlier of – the date of the lease agreement and – the date of commitment by the par6es to the principal provisions of the lease. • As at this date: a) a lease is classified as either or a finance or an opera6ng lease; and b) in the case of a finance lease, • the amounts to be recognised at the commencement of the lease term are determined. Commencement Date of Lease
•
Commencement date of the lease – the date on which a lessor makes an underlying asset available for use by a lessee – It is the date of ini6al recogni6on of the lease •
The 6me lag between the incep6on and the commencement of a lease is not significant in normal case, but when there is 6me lag, the amount measured for recogni6on at incep6on may not be the same with the amount if measured at commencement. Finance Lease •
Opera-ng Lease The standard specifies that – the 6ming of recogni6on is at commencement but – the amount for recogni6on is based on the measurement at incep6on. LESSOR 01 Sales Type Lease
(Manufacturer/Dealer Lessor) 1. Sales revenue (assuming outright sales of finished goods inventory at fair value) 2. Interest income from financing services rendered to the lessee Lease 02 Direct Financing 1.
Interest income from financing services rendered to the lessee Accounting for Leases: Lessor
Lease Payments
Generally include:
1. Fixed payments.
2. Variable payments.
3. Residual values (guaranteed or not).
4. Payments the lessee is reasonably certain to exercise.
LO 3
Accounting for Leases: Lessor
Discount Rate
u
Implicit rate should be used to determine the present
value of the lease payments.
u
Defined as the discount rate that, at commencement
of the lease, causes the present value of the lease
payments and unguaranteed residual value to be
equal to the fair value of the leased asset.
LO 3
Accounting for Leases: Lessor
Accounting Measurement and Presentation
For a direct finance lease,
l
the lessor records a Lease Receivable and eliminates the leased asset.
Dr
Lease receivable
Cr
l
Equipment
xxx
xxx
the lease receivable is computed as:
LO 3
Scenario 1
DIRECT FINANCING LEASE (LESSOR)
Lessor merely provides financing services
Apply lessee and lessor accoun6ng to finance and opera6ng leases. On 31 December 2019, Spinco Bhd leased a vehicle to Dora Bhd. Spinco Bhd had purchased the vehicle on that day at an amount equal to its fair value of RM179,442. The lease agreement contained the following terms: Lease term 4 years Annual payment, payable in advance on 31 Dec each year RM47,800 Economic life of vehicle 6 years Es6mated residual value at the end of economic life RM4,000 Es6mated residual value at end of lease term RM30,000 Residual value guaranteed by lessee RM15,000 LO 6
Scenario 1
DIRECT FINANCING LEASE (LESSOR)
Lessor merely provides financing services
Apply lessee and lessor accoun6ng to finance and opera6ng leases. Other details:
§ If Dora Bhd terminated the lease before the end of the 4-year lease term, Dora
Bhd will incur a penalty equivalent to 2 years’ lease payments.
§ An amount of RM3,800 paid by the lessee (to cover reimbursement for the
insurance and maintenance paid by the lessor) is included in the lease payment
(executory cost)
§ The cost to draw up the agreement cost RM2,915 to the lessor (initial direct
costs)
§ The lessor sets the annual rental payment to earn a rate of return of 7 percent
per year (implicit rate) on its investment
LO 6
Lease Classifica6on Test: Lessor 1. Transfer of ownership test No. Vehicle is returned to the lessor at the end of the lease term 2. Purchase op6on test The lease terms do not contain purchase op6on 3. Lease term test No. 4/6 = 66.7%, using 75% as the guideline, the lease term does not cover major part of the economic life of the lease asset 4. Present value test PV of MLP = 170,913 (refer to next slide) Fair value of lease asset = 179,442 + 2,915 = 182,357 (Net investment) 170,913/182,357 = 93.7% (> 90%, meet the criterion) 5. Alterna6ve use test No, the vehicle is not of specialised nature Other indicators: Substan6al penalty is imposed if the lessee cancels the lease early, so this also suggests a finance lease ✔ ✔ 31/12/19 31/12/20 31/12/21 31/12/22 31/12/23 PV of MLP Unguaranteed residual value Total Date 31/12/19 31/12/19 31/12/20 31/12/21 31/12/22 31/12/23 Total Lease payment 44,000 44,000 44,000 44,000 15,000 Discount factor 1 0.934579439 0.873438728 0.816297877 0.762895212 Present value 44,000 41,121 38,431 35,917 11,443 170,913 15,000 206,000 0.762895212 11,443 182,357 Lease Interest payment rate 44,000 44,000 0.07 44,000 0.07 44,000 0.07 30,000 0.07 Interest Revenue 0.00 9,685 7,283 4,713 1,963 23,643 Reduc6on in receivables 44,000 34,315 36,717 39,287 28,037 Balance of receivable 182,357 138,357 104,042 67,325 28,037 0 Lease receivable = Net investment = fair value of lease asset (include ini6al direct cost) = 182,357 = PV of MLP + unguaranteed residual value Gross investment =206,000 Unearned finance income =206,000 -­‐182,357 =23,643 31/12/19 Journal entries for lessor Vehicle Bank Purchase of motor vehicle to be leased out to lessee 182,357 182,357 Lease receivable Vehicle Lease of vehicle to Dora Bhd 31/12/2020 182,357 182,357 Lease receivable Cash Payment of ini6al direct costs for agreement etc. 2,915 Cash Lease receivable Reimbursement in advance (liability) Receipt of first payment from lessee 47,800 2,915 44,000 3,800 Insurance and maintenance (expense) Cash Paid for insurance and maintenance 3,800 Reimbursement in advance (liability) Reimbursement income (Income) To transfer reimbursement liability to income* 3,800 Cash Lease receivable Interest revenue Reimbursement in advance Received second lease payment and advances for repair and maintenance from lessee 47,800 Play time, yeah !
3,800 3,800 34,315 9,685 3,800 *Note: When insurance and maintenance expenses are paid, the reimbursement in advance (liability) is sejled, so it will be transferred to income to offset with repair and maintenance expense