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Transcript of Copyright © 2007 by The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 15-1 Chapter Fifteen...
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-1
Chapter FifteenChapter FifteenLeasesLeases
© 2007 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Chapter 15
Leases
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-3
Basic Lease Terms
A lease is an agreement in which A lease is an agreement in which the the lessorlessor conveys the right to conveys the right to
use property, plant, or use property, plant, or equipment, for a stated period of equipment, for a stated period of
time, to the time, to the lesseelessee..Lessor: Lessor:
Owner of Owner of propertyproperty
Lessor: Lessor: Owner of Owner of propertyproperty
Lessee: User of propertyLessee: User of propertyLessee: User of propertyLessee: User of property
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-4
Lease Classifications
Lessee Lessor
Operating lease Operating lease
Capital lease Direct financing lease
Sales-type lease
Lessee Lessor
Operating lease Operating lease
Capital lease Direct financing lease
Sales-type lease
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-5
Capital Lease Classification
OwnershipOwnership transferstransfers to the lessee during or at the to the lessee during or at the end of the lease term, or . . . end of the lease term, or . . .
A A bargain purchase optionbargain purchase option (BPO) exists, or . . .(BPO) exists, or . . . The noncancelable lease term is equal to The noncancelable lease term is equal to 75% or 75% or
moremore of the expected economic life of the asset, of the expected economic life of the asset, or . . .or . . .
The PV of the minimum lease payments is The PV of the minimum lease payments is 90% 90% or more of the fair valueor more of the fair value of the asset.of the asset.
OwnershipOwnership transferstransfers to the lessee during or at the to the lessee during or at the end of the lease term, or . . . end of the lease term, or . . .
A A bargain purchase optionbargain purchase option (BPO) exists, or . . .(BPO) exists, or . . . The noncancelable lease term is equal to The noncancelable lease term is equal to 75% or 75% or
moremore of the expected economic life of the asset, of the expected economic life of the asset, or . . .or . . .
The PV of the minimum lease payments is The PV of the minimum lease payments is 90% 90% or more of the fair valueor more of the fair value of the asset.of the asset.
A capital leasecapital lease if it meets one of four criteria:
A A BPOBPO gives the lessee the option gives the lessee the option to purchase the leased asset at a to purchase the leased asset at a price sufficiently less than the price sufficiently less than the expected fair value of the asset expected fair value of the asset that the exercise of the option that the exercise of the option appears reasonably assured.appears reasonably assured.
The The lease termlease term is normally considered to be is normally considered to be the noncancelable term of the lease plus any the noncancelable term of the lease plus any periods covered by periods covered by bargain renewal optionsbargain renewal options. .
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-6
Capital Lease
A capital lease is treated as the A capital lease is treated as the purchase of an asset – the purchase of an asset – the lessee records both an lessee records both an assetasset and and liabilityliability at inception of the at inception of the lease.lease.
Leased AssetLeased Asset PVPVLease liabilityLease liability PVPV
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-7
Additional Lessor Conditions
The four classification apply to both the The four classification apply to both the lessee and lessor. However, for the lessor, lessee and lessor. However, for the lessor, the agreement must meet the agreement must meet two additional two additional conditionsconditions for the lease to be a non- for the lease to be a non-operating lease (either a direct financing or operating lease (either a direct financing or sales-type lease):sales-type lease):
1.1. The The collectibilitycollectibility of the lease payments of the lease payments must be reasonably predictable.must be reasonably predictable.
2.2. If any costs to the lessor have yet to be If any costs to the lessor have yet to be incurred they are reasonably predictable. incurred they are reasonably predictable. Performance by the lessor is Performance by the lessor is substantially substantially completecomplete..
The four classification apply to both the The four classification apply to both the lessee and lessor. However, for the lessor, lessee and lessor. However, for the lessor, the agreement must meet the agreement must meet two additional two additional conditionsconditions for the lease to be a non- for the lease to be a non-operating lease (either a direct financing or operating lease (either a direct financing or sales-type lease):sales-type lease):
1.1. The The collectibilitycollectibility of the lease payments of the lease payments must be reasonably predictable.must be reasonably predictable.
2.2. If any costs to the lessor have yet to be If any costs to the lessor have yet to be incurred they are reasonably predictable. incurred they are reasonably predictable. Performance by the lessor is Performance by the lessor is substantially substantially completecomplete..
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-8
Operating Leases
None of the criteria None of the criteria for a capital lease is for a capital lease is
met.met.
None of the criteria None of the criteria for a capital lease is for a capital lease is
met.met.
Record lease as an Record lease as an Operating LeaseOperating Lease
Record lease as an Record lease as an Operating LeaseOperating Lease
Simply record rent Simply record rent over the lease termover the lease termSimply record rent Simply record rent over the lease termover the lease term
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-9
OPERATING LEASES
On January 1, 2006, Sans Serif Publishers, Inc., leased a color copier from CompuDec Corporation.
The lease agreement specifies four annual payments of $100,000 beginning January 1, 2006, the inception of the lease, and at each January 1 through 2009. The useful life of the copier is estimated to be six years. Sans Serif considered purchasing the copier for its cash price of $479,079. If funds were borrowed to buy the copier the interest rate would have been 10%.
How should this lease be classified?
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-10
OPERATING LEASES1 Does the agreement specify that ownership of the asset transfers to the lessee? NO2 Does the agreement contain a bargain purchase option? NO3 Is the lease term equal to 75% or more of the expected economic life of the asset? NO
{4 yrs < 75% of 6 yrs}4 Is the present value of the minimum lease payments equal to or greater than 90% NO
of the fair value of the asset? {$348,685 < 90% of $479,079}
$100,000 x 3.48685** = $348,685 lease presentpayments value
** present value of an annuity due of $1: n=4, i=10%
Since none of the four classification criteria is met, this is an operating lease.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-11
Operating LeasesAt Each of the Four Payment Dates
Sans Serif Publishers, Inc. (Lessee)Prepaid rent 100,000
Cash 100,000
CompuDec Corporation (Lessor)Cash 100,000
Unearned rent revenue100,000
At the End of Each YearSans Serif Publishers, Inc. (Lessee)
Rent expense 100,000Prepaid rent 100,000
CompuDec Corporation (Lessor)Unearned rent revenue 100,000
Rent revenue 100,000Depreciation expense x,xxx
Accumulated depreciation x,xxx
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-12
Operating LeasesADVANCE PAYMENTS Advance payments are considered prepayments of rent.
They are deferred and allocated to rent over the lease term.
LEASEHOLD IMPROVEMENTS Sometimes a lessee will make improvements to leased
property that reverts back to the lessor at the end of the lease.
If a lessee constructs a new building on or makes modifications to existing structures, that cost represents an asset just like any other capital expenditure. Like other assets, its cost is allocated as depreciation expense over its useful life to the lessee, which will be the shorter of the physical life of the asset or the lease term.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-13
Let’s look at Let’s look at non-operating non-operating leases now.leases now.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-14
Capital Leases - LesseeThe amount recorded (as both an asset and liability) The amount recorded (as both an asset and liability) is the is the present value of the minimum lease present value of the minimum lease paymentspayments. However, the amount recorded cannot . However, the amount recorded cannot exceed the fair value of the leased asset.exceed the fair value of the leased asset.
The amount recorded (as both an asset and liability) The amount recorded (as both an asset and liability) is the is the present value of the minimum lease present value of the minimum lease paymentspayments. However, the amount recorded cannot . However, the amount recorded cannot exceed the fair value of the leased asset.exceed the fair value of the leased asset.
In calculating the PV of the payments, the discount In calculating the PV of the payments, the discount rate used by the lessee is the lower of:rate used by the lessee is the lower of:
1.1. Its incremental borrowing rate, orIts incremental borrowing rate, or
2.2. The implicit interest rate used by the lessor (when The implicit interest rate used by the lessor (when calculating lease payments).calculating lease payments).
In calculating the PV of the payments, the discount In calculating the PV of the payments, the discount rate used by the lessee is the lower of:rate used by the lessee is the lower of:
1.1. Its incremental borrowing rate, orIts incremental borrowing rate, or
2.2. The implicit interest rate used by the lessor (when The implicit interest rate used by the lessor (when calculating lease payments).calculating lease payments).
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-15
Nonoperating Leases - Lessor
When the lessor is a manufacturer or dealer, the fair When the lessor is a manufacturer or dealer, the fair value of the property at the inception of the lease is value of the property at the inception of the lease is likely to be its likely to be its normal selling price, exceeding its normal selling price, exceeding its
cost by its gross profit margincost by its gross profit margin..
When the lessor is a manufacturer or dealer, the fair When the lessor is a manufacturer or dealer, the fair value of the property at the inception of the lease is value of the property at the inception of the lease is likely to be its likely to be its normal selling price, exceeding its normal selling price, exceeding its
cost by its gross profit margincost by its gross profit margin..
If the lessor is a leasing company rather than a If the lessor is a leasing company rather than a manufacturer or dealer, the fair value of the manufacturer or dealer, the fair value of the
leased asset typically is the lessor’s cost.leased asset typically is the lessor’s cost.
If the lessor is a leasing company rather than a If the lessor is a leasing company rather than a manufacturer or dealer, the fair value of the manufacturer or dealer, the fair value of the
leased asset typically is the lessor’s cost.leased asset typically is the lessor’s cost.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-16 Direct Financing Leases –
Lessee and Lessor Calculations
On Dec. 31, 2006, Sans Serif leased a copier from First LeaseCorp. which purchased the equipment from CompuDec at a cost of $479,079.
Annual payments beginning Dec. 31, 2006, the inception of the lease, and at each Dec. 31 through 2011.
The 6-year lease term is equal to the estimated life of the copier.
The interest rate is 10%.Lessor:
$479,079 ÷ 4.79079** = $100,000 lessor’s
rental cost payments
Lessee:$100,000 x 4.79079** = $479,079 rental lessee’s payments cost
** present value of an annuity due of $1: n=6, i=10%
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-17
Direct Financing Leases – Lessee and Lessor Entries
Inception of Lease [Dec. 31, 2006] Sans Serif Publishers, Inc. (Lessee)Leased equipment (present value of payments) 479,079
Lease payable (present value of payments) 479,079
First LeaseCorp (Lessor)Lease receivable (gross sum of payments) 600,000
Unearned interest revenue (difference) 120,921Inventory of equipment (lessor’s cost)479,079
First Lease Payment [Dec. 31, 2006]Sans Serif Publishers, Inc. (Lessee)Lease payable 100,000
Cash 100,000
First LeaseCorp (Lessor)Cash 100,000
Lease receivable 100,000
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-18
Second Lease Payment [Dec. 31, 2007]
Sans Serif Publishers, Inc. (Lessee)
Interest expense (10% x [$479,079 – 100,000]) 37,908
Lease payable (difference) 62,092Cash (rental payment) 100,000
First LeaseCorp (Lessor)Cash (rental payment) 100,000
Lease receivable 100,000Unearned interest revenue 37,908
Interest revenue (10% x [$600,000-120,921-100,000])
37,908
Outstanding Balance
Effective Rate
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-19
LEASE AMORTIZATION SCHEDULE
Effective Decrease OutstandingPayments Interest in Balance Balance
Dec. 31 10% x Outstanding Balance
2006 479,079
2006 100,000 100,000 379,079
2007 100,000 .10 (379,079) = 37,908 62,092 316,987
2008 100,000 .10 (316,987) = 31,699 68,301 248,686
2009 100,000 .10 (248,686) = 24,869 75,131 173,555
2010 100,000 .10 (173,555) = 17,355 82,645 90,910
2011 100,000 .10 (90,910) = 9,090 90,910 0 600,000 120,921 479,079
No interest yet; no time has passed.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-20
DEPRECIATIONEnd of Each Year
Sans Serif Publishers, Inc. (Lessee)Depreciation exp. ($479,079 ÷ 6 years*) 79,847
Accumulated depreciation79,847
* if the lessee depreciates assets by the straight-line method
The lessee normally should depreciate a leased asset over the term of the lease.
However, if:(a) ownership transfers, or (b) a bargain purchase option is present (i.e., either of the first two classification criteria is met) the asset
should be depreciated over the asset's useful life.
Depreciation expense is recorded in a manner consistent with the
company’s usual policy concerning depreciation of other operational
assets.
Depreciation expense is recorded in a manner consistent with the
company’s usual policy concerning depreciation of other operational
assets.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-21
Sales-Type LeasesOn December 31, 2006, Sans Serif Publishers, Inc. leased a copier from CompuDec at a “price” of $479,079.
The lease agreement specifies annual payments of $100,000 beginning Dec. 31, 2006, the inception of the lease, and at each Dec. 31 through 2011. The six-year lease term is equal to the estimated useful life of the copier.
CompuDec manufactured the copier at a cost of $300,000. CompuDec’s interest rate for financing the transaction is 10%.
Lease receivable ($100,000 x 6) 600,000Cost of goods sold (lessor’s cost) 300,000
Sales revenue (PV of minimum lease payments) 479,079Unearned interest revenue ($600,000 - 479,079) 120,921Inventory of equipment (lessor’s cost) 300,000
First Lease PaymentCash 100,000
Lease receivable 100,000
479,079
Direct Financing LeaseOn December 31, 2006, Sans Serif Publishers, Inc. leased a copier from First LeaseCorp at a “price” of $479,079.
First LeaseCorp purchased the copier at a cost of $479,079. First LeaseCorp’s interest rate for financing the transaction is 10%.
Now, let’s make it a sales-type
lease
Since the lessor’s cost is $300,000, a dealer’s profit exists.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-22
What if the What if the asset has a asset has a
residual residual value?value?
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-23
Residual Value
The residual value of a leased asset is an The residual value of a leased asset is an estimate of what its estimate of what its commercial valuecommercial value will will be at the end of the lease term. Let’s see be at the end of the lease term. Let’s see
how residual value impacts the accounting how residual value impacts the accounting for leases by both the lessee and lessor.for leases by both the lessee and lessor.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-24
Residual Value
The only impact on the lessee is the effect The only impact on the lessee is the effect on on calculating calculating depreciationdepreciation expense. expense.
In determining the amount to capitalize as In determining the amount to capitalize as a a leased asset and to record as a lease leased asset and to record as a lease liability, the liability, the lessee ignores the residual lessee ignores the residual value.value.
First Assume the Lessee will First Assume the Lessee will Obtain Title to Leased Asset.Obtain Title to Leased Asset.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-25
Residual Value
Now Assume the Lessor will Now Assume the Lessor will Retain Title to Leased AssetRetain Title to Leased Asset
The amount needed to be recovered The amount needed to be recovered by the by the lessorlessor through periodic lease through periodic lease payments is payments is reduced by the PV of the reduced by the PV of the residual value. residual value. The The lesseelessee considers the “purchase” considers the “purchase” price” price” to include the PV of the residual to include the PV of the residual value as value as an additional “payment” an additional “payment” ifif the the lessee lessee guaranteesguarantees the residual value to the residual value to be a be a particular amount.particular amount.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-26
RESIDUAL VALUEThe estimated useful life of the copier is 7 years. At the
end of the 6-year lease term the copier is expected to be worth $60,000.
Lessor’s Calculation of Lease Payments
Amount to be recovered (fair value) $479,079Less: PV of the residual value ($60,000 x .56447*)
(33,868)Amount to be recovered thru lease payments $445,211
Lease payments at the beg. of each of the next 6 yrs: ($445,211 ÷ 4.79079**) $ 92,931
* present value of $1: n=6, i=10%** present value of an annuity due of $1: n=6, i=10%
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-27
Lessee’s Calculation When There is a Residual Value
On the other side of the transaction, the lessee considers the “purchase” price of the copier to include, at a minimum, the PV of the periodic rental payments ($445,211):$92,931 x 4.79079** = $445,211 rental present payments value
** present value of an annuity due of $1: n=6, i=10%
If Residual Value is Guaranteed:
PV of periodic payments $445,211 Plus: PV of the residual value ($60,000 x .56447*)
33,868PV of minimum lease payments [Recorded as a leased asset and a lease liability]
$479,079* present value of $1: n=6, i=10%** present value of an annuity due of $1: n=6, i=10%
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-28 AMORTIZATION SCHEDULE
WITH RESIDUAL VALUEEffective Decrease
OutstandingPayments Interest in Balance Balance
10% x Outstanding Balance
2006 479,079
2006 92,931 92,931 386,148
2007 92,931 .10 (386,148) = 38,615 54,316 331,832
2008 92,931 .10 (331,832) = 33,183 59,748 272,084
2009 92,931 .10 (272,084) = 27,208 65,723 206,361
2010 92,931 .10 (206,361) = 20,636 72,295 134,066
2011 92,931 .10 (134,066) = 13,407 79,524 54,542
2012 60,000 .10 (54,542) = 5,458* 54,542 0
617,586 138,507 479,079
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-29
Executory CostsExecutory costs include cost of ownership like Executory costs include cost of ownership like
maintenance, insurance, taxes, and other costs. If maintenance, insurance, taxes, and other costs. If the lease agreement makes the lessee responsible the lease agreement makes the lessee responsible
for the executory costs, they are treated as for the executory costs, they are treated as expenses by the lessee.expenses by the lessee.
In some cases, the lessor pay executory costs, and In some cases, the lessor pay executory costs, and the lessee will reimburse the lessor through higher the lessee will reimburse the lessor through higher periodic lease payments. These costs are excluded periodic lease payments. These costs are excluded
in determining the minimum lease payment.in determining the minimum lease payment.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-30
EFFECT OF A BARGAIN PURCHASE OPTION
A BPO gives the lessee the option of purchasing the leased property at a “bargain” price. The expectation that the option price will be paid effectively adds an additional cash flow for both the lessee and the lessor.
The lessor, when computing periodic rental payments, subtracts the PV of the BPO price from the amount to be recovered (fair market value) to determine the amount that must be recovered through the periodic rent payments.
The lessee adds the PV of the BPO price to the PV of periodic payments when computing the amount to be recorded as a leased asset and a lease liability.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-31
Initial Direct Costs
Incremental costs incurred by the lessor Incremental costs incurred by the lessor in negotiating and consummating a in negotiating and consummating a
lease agreement.lease agreement. Operating LeasesOperating Leases −− Capitalize and Capitalize and
amortize over the lease term by the amortize over the lease term by the lessor.lessor.
Direct Financing LeasesDirect Financing Leases −− Include as Include as part of investment balance.part of investment balance.
Incremental costs incurred by the lessor Incremental costs incurred by the lessor in negotiating and consummating a in negotiating and consummating a
lease agreement.lease agreement. Operating LeasesOperating Leases −− Capitalize and Capitalize and
amortize over the lease term by the amortize over the lease term by the lessor.lessor.
Direct Financing LeasesDirect Financing Leases −− Include as Include as part of investment balance.part of investment balance.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-32
Contingent Rentals
Sometimes rental payment may be Sometimes rental payment may be increased (or decreased) at some future increased (or decreased) at some future
time during the lease term, depending on time during the lease term, depending on whether or not some specified event whether or not some specified event
occurs.occurs.
Contingent rentals are not included in the Contingent rentals are not included in the minimum lease payments. However, they minimum lease payments. However, they are disclosed in the notes to the financial are disclosed in the notes to the financial
statements.statements.
Sometimes rental payment may be Sometimes rental payment may be increased (or decreased) at some future increased (or decreased) at some future
time during the lease term, depending on time during the lease term, depending on whether or not some specified event whether or not some specified event
occurs.occurs.
Contingent rentals are not included in the Contingent rentals are not included in the minimum lease payments. However, they minimum lease payments. However, they are disclosed in the notes to the financial are disclosed in the notes to the financial
statements.statements.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-33
Lessee Disclosures For capital leases, discloseFor capital leases, disclose
Gross amount of assets recorded under Gross amount of assets recorded under capital leases.capital leases.
Future MLP in the aggregate and for each Future MLP in the aggregate and for each of the five succeeding years.of the five succeeding years.
Total minimum sublease rentals to be Total minimum sublease rentals to be received in the future under noncancelable received in the future under noncancelable subleases.subleases.
Total contingent rentals.Total contingent rentals.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-34
Lessee Disclosures For operating leases in excess of one year, For operating leases in excess of one year,
disclosedisclose Future minimum rental payments required in the Future minimum rental payments required in the
aggregate and for each of the five succeeding aggregate and for each of the five succeeding fiscal years.fiscal years.
Total of minimum rentals to be received in the Total of minimum rentals to be received in the future under noncancelable subleases.future under noncancelable subleases.
For all operating leases, disclose rental expense, For all operating leases, disclose rental expense, with separate amounts for minimum rentals, with separate amounts for minimum rentals, contingent rentals, and sublease rentals.contingent rentals, and sublease rentals.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-35
Lessee Disclosures Provide a description of the lessee’s leasing Provide a description of the lessee’s leasing
arrangements including, but not limited to arrangements including, but not limited to The basis on which contingent rental payments The basis on which contingent rental payments
are determined.are determined. The existence and terms of renewal or purchase The existence and terms of renewal or purchase
options and escalation clauses.options and escalation clauses. Restrictions imposed by lease agreements, such Restrictions imposed by lease agreements, such
as those concerning dividends, additional debt, as those concerning dividends, additional debt, and further leasing.and further leasing.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-36
Lessor Disclosures For sales-type and direct financing leases, For sales-type and direct financing leases,
disclosedisclose Components of the net investment in sales-Components of the net investment in sales-
type and direct financing leasestype and direct financing leases1.1. Future MLP to be received.Future MLP to be received.
2.2. Unguaranteed residual values.Unguaranteed residual values.
3.3. Unearned Interest Revenue.Unearned Interest Revenue. Future MLP to be received for each of the five Future MLP to be received for each of the five
succeeding fiscal years.succeeding fiscal years. Total contingent rentals included in income.Total contingent rentals included in income.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-37
Lessor Disclosures For operating leases, discloseFor operating leases, disclose
Cost and carrying amount of property on lease or Cost and carrying amount of property on lease or held for leasing. held for leasing.
Minimum future rentals on noncancelable leases Minimum future rentals on noncancelable leases in the aggregate and for each of the five in the aggregate and for each of the five succeeding years.succeeding years.
Total contingent rentals included in income.Total contingent rentals included in income. Provide a general description of the lessor’s Provide a general description of the lessor’s
leasing arrangements.leasing arrangements.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-38
Balance Sheet & Income Statement
Lease transactions impact several financial Lease transactions impact several financial ratios:ratios:
1.1. Debt to equity ratio – Lease liabilities are Debt to equity ratio – Lease liabilities are recorded.recorded.
2.2. Rate of return on assets – Lease assets Rate of return on assets – Lease assets are recorded.are recorded.
Whether leases are capitalized or treated as Whether leases are capitalized or treated as an operating lease affects the income an operating lease affects the income statement and balance sheet. The greater statement and balance sheet. The greater impact is on the balance sheet.impact is on the balance sheet.
Lease transactions impact several financial Lease transactions impact several financial ratios:ratios:
1.1. Debt to equity ratio – Lease liabilities are Debt to equity ratio – Lease liabilities are recorded.recorded.
2.2. Rate of return on assets – Lease assets Rate of return on assets – Lease assets are recorded.are recorded.
Whether leases are capitalized or treated as Whether leases are capitalized or treated as an operating lease affects the income an operating lease affects the income statement and balance sheet. The greater statement and balance sheet. The greater impact is on the balance sheet.impact is on the balance sheet.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-39
Statement of Cash Flows
Operating leasesOperating leases - Rent expense is a cash - Rent expense is a cash outflow to the lessee and a cash inflow to outflow to the lessee and a cash inflow to the lessor.the lessor.
Capital & Direct Financing LeasesCapital & Direct Financing Leases – Lessee – Lessee reports interest expense as an outflow reports interest expense as an outflow from operating activities and principal from operating activities and principal payment as an outflow from financing payment as an outflow from financing activities. The lessor has a cash inflow activities. The lessor has a cash inflow from operating activities and investing from operating activities and investing activities.activities.
Operating leasesOperating leases - Rent expense is a cash - Rent expense is a cash outflow to the lessee and a cash inflow to outflow to the lessee and a cash inflow to the lessor.the lessor.
Capital & Direct Financing LeasesCapital & Direct Financing Leases – Lessee – Lessee reports interest expense as an outflow reports interest expense as an outflow from operating activities and principal from operating activities and principal payment as an outflow from financing payment as an outflow from financing activities. The lessor has a cash inflow activities. The lessor has a cash inflow from operating activities and investing from operating activities and investing activities.activities.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-40
Statement of Cash Flows
Sales-type leasesSales-type leases – The lessor recognizes – The lessor recognizes the interest revenue in the operating the interest revenue in the operating activities section of the statement and the activities section of the statement and the principal reduction in the investing principal reduction in the investing section. In addition, the lessor has sales section. In addition, the lessor has sales revenue and cost of goods sold revenue and cost of goods sold recognized in the operating activities recognized in the operating activities section.section.
Sales-type leasesSales-type leases – The lessor recognizes – The lessor recognizes the interest revenue in the operating the interest revenue in the operating activities section of the statement and the activities section of the statement and the principal reduction in the investing principal reduction in the investing section. In addition, the lessor has sales section. In addition, the lessor has sales revenue and cost of goods sold revenue and cost of goods sold recognized in the operating activities recognized in the operating activities section.section.
Copyright © 2007 by The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide15-41
End of Chapter 15