| Lease
Definition-- A Lease is a contract whereby one party,
referred
to as the Lessor, provides real or personal property for the use of
another,
referred to as the Lessee, in return for a periodic consideration,
referred
to as the rent. |
Accounting
problem-- to identify those situations that are in
substance
equivalent to the purchase of the property, but are legally disguised
as
a lease arrangement.
| A
lease that transfers substantially all of the benefits and risks
incident
to ownership of property should be accounted for as the acquisition of
an asset and the incurrence of an obligation by the lessee and as a
sale
or financing by the lessor. In a lease that transfers
substantially
all of the benefits and risks of ownership, the economic effect on the
parties is similar, in many respects, to that of an installment
purchase.
(FAS No. 13, para. 60) |
|
| I. |
Types
of Leases |
|
A. |
Lessee: |
|
|
1. |
Operating lease |
|
|
2. |
Capital lease |
|
|
Capital lease
criteria: (any
one of the following) |
|
|
a. |
Transfer of title |
|
|
b. |
Bargain purchase option |
|
|
c. |
Lease term at least 75% of
economic life
of the leased property |
|
|
d. |
PV of minimum lease payments at
least
90% of fair value of leased property at the inception of the lease |
|
B. |
Lessor: |
|
|
1. |
Operating lease |
|
|
2. |
Capital lease |
|
|
Capital lease
criteria: |
|
|
a. |
same as the lessee, plus |
|
|
b. |
collection of the lease
payments is reasonably
predictable |
|
|
c. |
there are no important
uncertainties
surrounding the amounts of future unreimbursable costs to be incurred
by
the lessor |
|
|
Direct Financing
leases--only
income in the form of interest |
|
|
Sales type
leases--some element
of manufacturer or dealer profit |
| II. |
Accounting for
Capital Leases |
|
A. |
Lessee |
|
B. |
Lessor |
|
|
1. |
Direct Financing |
|
|
2. |
Sales type |
| III. |
Accounting for
Operating
Leases |
|
A. |
Lessee |
|
B. |
Lessor |
| IV. |
Special Problems |
|
A. |
Residual values |
|
|
1. |
Guaranteed |
|
|
2. |
Unguaranteed |
|
B. |
Initial Direct Costs |
|
C. |
Leases Involving
Real Estate
flowchart
for Land and Building Leases |
|
D. |
Sale/leaseback
transactions |
|
E. |
Executory costs |