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Section 8100: Leases

International Accounting Standard 17
Leases

1. First version of IAS 17
"Accounting for Leases" issued in September 1982

2. Revisions
December 1997, Leases
December 2003

[U.S. GAAP Codification Topic]
840 Leases
840-10 Overall
840-20 Operating leases
840-30 Capital leases
840-40 Sale-leaseback transactions

3. Inception of the lease
Date of lease agreement
If principal provisions are committed at an earlier date, the commitment date

4. Commencement of the lease term
The first day when lessee is entitled to
the right to use the leased asset

5. Inception and commencement
Lease is classified at the inception of the lease.
Lease is recognised at the commencement of the lease term.
At the inception of the lease, lease is agreed.
At the commencement of lease term, lessee starts using the asset.

6. Classification of Leases, IAS 17.8
Does the lease transfer the risks and rewards of ownership?
--> If yes, finance lease
--> If no, operating lease

7. Risks and Rewards of Ownership, IAS 17.8
When are the risks and rewards of ownership transferred?
(1) Loss of cancellation
Lessor's loss of lease cancellation is assumed by lessee
(2) Continuation of lease term
Lessee can renew the lease contract, at substantially below market rent
(3) Fair value of residual
Lessee assumes gains and losses due to the changes in fair value of residual

8. Lease Classification Criteria, U.S. GAAP, ASC 840-10-25-1
(1-1) Ownership transfer
(1-2) Bargain purchase option, BPO
(1-3) 75% rule: lease term ≥ 75% of estimated economic life
(1-4) 90% rule: present value of minimum lease payment ≥ 90% of fair value

9. Two additional criteria for the lessor, U.S. GAAP, ASC 840-10-25-1
(2-1) Collectibility of minimum lease payments: reasonably predictable
(2-2) No important uncertainties: about the amount of unreimbursable costs to incur

10. Sales-type Lease, U.S. GAAP, ASC 840-10-25-43
(3-1) Manufacturer's or dealer's profit or loss

11. Lease Classification by Lessee, U.S. GAAP, ASC 840-10-25-29
Capital lease: a lease that meets any of the 4 criteria in 840-10-25-1
Operating lease: a lease that meets none of the 4 criteria in 840-10-25-1

12. Lease Classification by Lessor, U.S. GAAP, ASC 840-10-25-43
(1) Sales-type lease: meets 1-1, 1-2, 1-3, 1-4, 2-1, 2-2, 3-1
(2) Direct financing lease: meets 1-1, 1-2, 1-3, 1-4, 2-1, 2-2, except 3-1
(3) Leveraged lease: a type of direct financing lease that meets 4-1, 4-2, 4-3

13. Criteria for Leveraged Lease, U.S. GAAP, ASC 840-10-25-43
(4-1) at least three parties: long-term creditor, lessor (equity participant), lessee

(4-2) financing by long-term creditor meets 4-2-a, 4-2-b
(4-2-a) sufficient to provide substantial leverage to the lessor
(4-2-b) nonrecourse as to the general credit of lessor

(4-3) lessor's net investment meets 4-3-a, 4-3-b
(4-3-a) declines in early years
(4-3-b) rises in later years

14. Finance Lease: Lessee, IAS 17.20
Lessee recognises finance leases, in the statement of financial position,
--> as assets and liabilities

15. The amount to be recognised by lessee, IAS 17.20
is the lower of (1) and (2):
(1) fair value of leased asset
(2) present value of minimum lease payments
(1) and (2) are measured at the inception of the lease

16. Discount rate for present value calculation is (3), IAS 17.20
(3) interest rate implicit in the lease
If (3) cannot be determined --> use (4)
(4) lessee's incremental borrowing rate

17. Subsequent Measurement, IAS 17.25
Minimum lease payment = (5) + (6)
(5) finance charge
(6) reduction of lease liability

18. Allocation of finance charge is made to generate (7)
(7) constant periodic rate of interest on (8)
(8) remaining balance of lease liability

19. Finance Lease: Lessor, IAS 17.36
Lessor recognises finance leases, in the statement of financial position
--> as a receivable

20. The amount to be recognised by lessor
is the amount of net investment in the lease

21. Finance Lease: Lessor, IAS 17.37
Lease payment receivable = (1) + (2)
(1) repayment of principal
(2) finance income

22. Finance income is recognised, in a pattern of generating (3)
(3) constant periodic rate of return on (4)
(4) lessor's net investment in finance lease

23. Finance Lease: Lessor, IAS 17.42
Manufacturer or dealer lessors
--> Recognise selling profit or loss in the period

24. Operating Lease: Lessee, IAS 17.33
Lease payments under operating lease
--> are recognised as an expense
using a straight-line method over the lease term

25. Operating Lease: Lessor, IAS 17.50
Lease income from operating leases
--> is recognised in income
using a straight-line method over the lease term
Lease assets are reported
--> in the lessor's statement of financial position, IAS 17.49

26. Operating Lease: Lessor, IAS 17.52
Initial direct costs
(1) added to carrying amount of lease asset
(2) recognised as an expense
(3) using a straight-line method over the lease term

27. Sale and Leaseback: Finance Lease, IAS 17.59
The excess of (1) over (2) is deferred and amortised over the lease term
(1) sales proceeds
(2) carrying amount of lease asset

28. Sale and Leaseback: Operating Lease, IAS 17.61
If sale price = fair value
--> Profit or loss is recognised immediately

If sale price > fair value
--> The excess over fair value is deferred and
amortised over the period the asset is used

If sale price < fair value
--> Loss is recognised immediately

29. Exception, IAS 17.61
When the loss is compensated by
below market lease payments in the future
--> The loss is deferred and
amortised over the period the asset is used

30. Sale and Leaseback: Operating Lease, IAS 17.63
If fair value < carrying amount
--> Loss is recognised immediately

31. Sale and Leaseback, U.S. GAAP, ASC 840-40-25-3
General Rule:
For sale and leaseback transactions
--> Profit or loss on the sale is deferred

32. There are 3 exceptions,

Exception 1, ASC 840-40-25-3-a

If seller-lessee retains the right to use only a minor portion of the property
and
gives up the right to use substantially all of the property
--> The sale and The leaseback are considered as separate transactions

Exception 2, ASC 840-40-25-3-b

If seller-lessee retains the right to use more than a minor portion of the property
but less than substantially all of the property and realizes a profit on the sale,
--> Profit on the sale in excess of (1) or (2) is recognized, at the date of sale
(1) operating lease: PV of minimum lease payments
(2) capital lease: recorded amount of leased assets

Exception 3, ASC 840-40-25-3-c

If fair value of the property < undepreciated cost,
--> Loss is recognized immediately

33. Sale and Leaseback, U.S. GAAP Summary, ASC 840-40-25-3
(1) Seller-lessee retains the right to use only a minor portion of the property
(2) Profit or loss on the sale is fully recognized
(3) The Sale and The Leaseback are separate transactions
(4) Seller-lessee retains the right to use more than a minor portion,
but less than substantially all of the property
--> Profit on the sale in excess is recognized at the date of sale
(5) Seller-lessee retains the right to use substantially all of the property
--> Profit or loss on the sale is deferred