Leases

Leases

1. Classification

   • Operating
     • Leases not classified as finance
     • Accounting / Recognition
       • Straight-line basis for both parties
   • Finance
     • Accounting / Recognition
       • Lessor
         • 1. Derecogn. asset; 2. Recogn. receivable = Net investment (GI (Min. lease pmts + unguarunteed RV) discounted @ interest implicit in lease); 3. Initial direct cost incl. in NI; 4. Recogn. finance income as per effective interest rate method; 5. Lease PMTS against GI
         • Remember manufacturer/dealer lessors
       • Lessee
         • 1. At inception of lease term recogn. an asset & liability at LOWER of: -FV of leased asset;-PV of min. lease pmts; 2. Apportion pmts between finance cost & capital; 3. Initial direct cost incl. in CA of asset; 4. Deprec. asset over shortest of lease term/econimic life
     • Possible indicators: 1. Ownership transferred at end of lease; 2. Option to purchase; 3. PV of min. lease pmts =/< FV of asset; 4. Specialised asset;

2. Interest rate (Implicit rate) : PV = Fair value of leased (Incl. Direct cost) asset ; PMT = Installment; FV = GRV +URV ; N = Lease term ;CompI= IIR

3. Calc. PV of min. lease pmts: PMT = Installment; FV = GRV(Only); N = term; i = IIR; CompPV=

4. Example journal (Excl. VAT or funnies)

5. Deferred tax

6. Sale & leaseback transaction

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