Lecture 6 Leases Sem 2 2014Song

1、FINANCIAL ACCOUNTING 250FINANCIAL ACCOUNTING 250AASB 117AASB 117Text: Chapter 14Text: Chapter 14Topic 6: LEASESTopic 6: LEASESObjectivesObjectives1.Understand the importance of leasing to 1.Understand the importance of leasing to Australian companiesAustralian companies2.Discuss the characteristics

2、of a lease2.Discuss the characteristics of a lease3.Explain the difference between, and 3.Explain the difference between, and identify how to classify, operating and identify how to classify, operating and finance leasesfinance leases4.Account for finance leases from the 4.Account for finance leases

3、 from the perspective of a lesseeperspective of a lessee5.Account for finance leases from the 5.Account for finance leases from the perspective of a perspective of a lessorlessor6.Account for finance leases by 6.Account for finance leases by manufacturer/ dealer manufacturer/ dealer lessorslessorsOb

4、jectivesObjectives7. Account for operating leases from the 7. Account for operating leases from the perspective of both lessors and lesseesperspective of both lessors and lessees8. Examine comprehensive leasing examples 8. Examine comprehensive leasing examples accounted for under AASB 117accounted

5、for under AASB 1179. Discuss the nature of a lease under the 9. Discuss the nature of a lease under the proposed new standardproposed new standard10.Explain changes in the accounting by 10.Explain changes in the accounting by lessees under lessees under the proposed standardthe proposed standard11.E

6、xplain the accounting for changes in 11.Explain the accounting for changes in the accounting by lessors under the the accounting by lessors under the proposed standardproposed standard12. Understand some of the other issues 12. Understand some of the other issues arising in accounting for leases und

7、er the arising in accounting for leases under the proposed standardproposed standardWhat Is a Lease?“an agreement whereby the lessor conveys to “an agreement whereby the lessor conveys to the lessee in return for a payment or series of the lessee in return for a payment or series of payments payment

8、s the right to usethe right to use an asset for an an asset for an agreed period of time”agreed period of time”(AASB 117 para 4)(AASB 117 para 4)May result in the eventual transfer of May result in the eventual transfer of ownership ownership Hire purchase agreementHire purchase agreementAASB 117 ex

9、cludes:AASB 117 excludes:Resource exploration rightsResource exploration rightsLicensing agreements Licensing agreements What is a lease? And how are they classified?Ruth PickerManaging PartnerErnst & Young MelbourneClassification Of Leases AASB 117 recognises the following types of AASB 117 rec

10、ognises the following types of leases:leases:Finance leaseFinance leaseOperating leaseOperating leaseA A finance lease finance lease is a lease which transfers is a lease which transfers substantially all ownership risk and rewards, substantially all ownership risk and rewards, with or without event

11、ual title transferwith or without eventual title transferRisks of ownership includeRisks of ownership include obsolescence, obsolescence, loss on sale, unsatisfactory performance, loss on sale, unsatisfactory performance, uninsured damageuninsured damageRewards of ownership include Rewards of owners

12、hip include benefits from benefits from use of the asset, appreciation in value of use of the asset, appreciation in value of the assetthe assetAn An operating leaseoperating lease is a lease other than a is a lease other than a finance leasefinance leaseClassification Classification decisiondecisio

13、nFinance leaseFinance leaseOperating leaseOperating leaseSubstantially Substantially all risks and all risks and rewards of rewards of ownership ownership transferredtransferredSubstance over form should be applied.Substance over form should be applied.Classification Of Leases Accounting treatment a

14、nd disclosures Accounting treatment and disclosures required differ substantially for finance required differ substantially for finance and operating leasesand operating leasesClassification GuidanceExamples of situations that individually or in Examples of situations that individually or in combina

15、tion would normally lead to a lease being combination would normally lead to a lease being classified as a finance lease are:classified as a finance lease are:(a) the lease transfers ownership of the asset to the (a) the lease transfers ownership of the asset to the lessee by the end of the lease te

16、rm;lessee by the end of the lease term;(b) the lessee has the option to purchase the asset at a (b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the price that is expected to be sufficiently lower than the fair value at the date the option

17、 becomes exercisable for fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the it to be reasonably certain, at the inception of the lease, that the option will be exercised;lease, that the option will be exercised;(c) the lease term is for the

18、 major part of the economic (c) the lease term is for the major part of the economic life of the asset even if title is not transferred;life of the asset even if title is not transferred; (judgment required)(d) at the inception of the lease the present value of (d) at the inception of the lease the

19、present value of the minimum lease payments amounts to at least the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; substantially all of the fair value of the leased asset; andand (judgment required)e) the leased assets are of such a e) the leased

20、assets are of such a specialisedspecialised nature nature that only the lessee can use them without major that only the lessee can use them without major modifications.(modifications.(parapara 10,AASB117) 10,AASB117)Indicators of situations that individually or in Indicators of situations that indiv

21、idually or in combination could also lead to a lease being combination could also lead to a lease being classified as a finance lease are:classified as a finance lease are:(a) if the lessee can cancel the lease, the (a) if the lessee can cancel the lease, the lessorslessors losses associated with th

22、e cancellation losses associated with the cancellation are borne by the lessee;are borne by the lessee;(b) gains or losses from the fluctuation in the (b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee fair value of the residual accrue to the lessee (for

23、example, in the form of a rent rebate (for example, in the form of a rent rebate equallingequalling most of the sales proceeds at the end of most of the sales proceeds at the end of the lease); andthe lease); and(c) the lessee has the ability to continue the (c) the lessee has the ability to continu

24、e the lease for a secondary period at a rent that is lease for a secondary period at a rent that is substantially lower than market rent.substantially lower than market rent. ( (parapara 11,AASB117)11,AASB117)Classification Guidancep462Classification GuidanceNon-cancellableNon-cancellable1.Lease can

25、 be cancelled only upon the 1.Lease can be cancelled only upon the occurrence of some remote contingencyoccurrence of some remote contingency2.Leases can be cancelled only with the 2.Leases can be cancelled only with the permission of the permission of the lessorlessor3.Lease where the lessee, upon

26、cancellation, 3.Lease where the lessee, upon cancellation, is committed to enter into a further lease for is committed to enter into a further lease for the same or equivalent asset with the same the same or equivalent asset with the same lessorlessor4.Leases that provide that the 4.Leases that prov

27、ide that the leaseeleasee, upon , upon cancellation, incurs a penalty large enough to cancellation, incurs a penalty large enough to discourage cancellation in normal discourage cancellation in normal circumstancescircumstancesMinimum Lease Payments (MLPs) MLPs = MLPs = Payments over lease termPayme

28、nts over lease term+ Guaranteed residual value + Guaranteed residual value * *+ Bargain purchase option + Bargain purchase option * * Contingent rent Contingent rent * * Reimbursement of costs paid by lessor Reimbursement of costs paid by lessor* * Defined on following slides Defined on following sl

29、idesCommonly referred to as executory costsMinimum Lease Payments (MLPs): Definitions Guaranteed residual valueGuaranteed residual valueAt the commencement of the lease, the lessor At the commencement of the lease, the lessor estimates the residual value of the asset at estimates the residual value

30、of the asset at the end of the lease term (based on market the end of the lease term (based on market conditions)conditions)Under a finance lease the lessee guarantees Under a finance lease the lessee guarantees that the lessor will realise at that amountthat the lessor will realise at that amountTh

31、e guarantee may range from 1% to 100% of the The guarantee may range from 1% to 100% of the residual valueresidual valueThe existence of a guaranteed residual value The existence of a guaranteed residual value indicates that the lessor has transferred indicates that the lessor has transferred risks

32、associated with movements in the risks associated with movements in the residual value to the lesseeresidual value to the lesseeMinimum Lease Payments (MLPs): DefinitionsBargain purchase optionBargain purchase optionA clause in the lease agreement allowing A clause in the lease agreement allowing th

33、e lessee to purchase the asset at the end the lessee to purchase the asset at the end of the lease term for a pre-set amountof the lease term for a pre-set amount (which is less than the expected residual (which is less than the expected residual value)value)The option price is normally to be The op

34、tion price is normally to be sufficiently lower than expected fair value sufficiently lower than expected fair value resulting in the exercising of the resulting in the exercising of the option becoming reasonably certainoption becoming reasonably certainMinimum Lease Payments (MLPs): DefinitionsCon

35、tingent rentContingent rentAdditional payments arising from increases Additional payments arising from increases /decreases in the schedule lease payments /decreases in the schedule lease payments due to the occurrence of particular events due to the occurrence of particular events specified in the

36、lease agreementspecified in the lease agreementEg- lease of a photocopier may specify Eg- lease of a photocopier may specify additional payments if the number of additional payments if the number of photocopies exceeds a certain amount in a photocopies exceeds a certain amount in a monthmonthReimbur

37、sement of costs paid by Reimbursement of costs paid by lessorlessorThese operating amounts include insurance, These operating amounts include insurance, maintenance, consumable supplies, maintenance, consumable supplies, replacement parts and rates.replacement parts and rates.These costs are given t

38、he generic title These costs are given the generic title executoryexecutory cost in this chapter. cost in this chapter.Minimum Lease Payments (MLPs): DefinitionsMinimum Lease Payments (MLPs): Determining Present ValueThe present value (PV) of MLPs is determined The present value (PV) of MLPs is dete

39、rmined by applying an appropriate discount rateby applying an appropriate discount rateDiscounting is not necessary if the lease Discounting is not necessary if the lease agreement contains one of the following (as agreement contains one of the following (as the PV of MLP = FV of the asset in such t

40、he PV of MLP = FV of the asset in such cases):cases): a bargain purchase option; or a bargain purchase option; or a 100% guaranteed residual value a 100% guaranteed residual valueThe discount rate is based on the interest The discount rate is based on the interest rate implicit in the leaserate impl

41、icit in the lease PV of (MLP +UGRV)=PV of (FV+ IDC) PV of (MLP +UGRV)=PV of (FV+ IDC)Classification Of Lease: ExampleOn 30 June 2014 Face Ltd leased a vehicle to Book Ltd.On 30 June 2014 Face Ltd leased a vehicle to Book Ltd.The FV of the vehicle at the inception of the lease was $89,721.The FV of t

42、he vehicle at the inception of the lease was $89,721.Lease establishment costs incurred by Face Ltd totalled $1,457.Lease establishment costs incurred by Face Ltd totalled $1,457.The lease agreement is for 4 years and the economic life of the The lease agreement is for 4 years and the economic life

43、of the vehicle is 6 years.vehicle is 6 years.The annual lease payments (payable in advance on 30 June each The annual lease payments (payable in advance on 30 June each year) are $23,900. This includes $1,900, representing a year) are $23,900. This includes $1,900, representing a reimbursement of in

44、surance and maintenance costs paid by the reimbursement of insurance and maintenance costs paid by the lessor.lessor.The lease is cancellable, but will incur a penalty equal to 2 The lease is cancellable, but will incur a penalty equal to 2 years lease payments.years lease payments.The PV of MLP has

45、 been calculated to be The PV of MLP has been calculated to be $85,457$85,457. .The estimated residual value of the asset at the end of the The estimated residual value of the asset at the end of the lease term is $15,000 and the guaranteed residual value is lease term is $15,000 and the guaranteed

46、residual value is $7,500. $7,500. Book Ltd intends on returning the asset to Face Ltd at the end Book Ltd intends on returning the asset to Face Ltd at the end of the lease term.of the lease term.The interest rate implicit in the lease is The interest rate implicit in the lease is 7%.7%.Required:Req

47、uired:Determine whether the lease is an operating or finance lease per Determine whether the lease is an operating or finance lease per AASB 17.AASB 17.Referred to as “executory costs”Classification Of Lease: ExampleP465Classification Of Lease: Example1.1.Is the lease non-cancellable?Is the lease no

48、n-cancellable?nThe lease is cancellable, but a significant The lease is cancellable, but a significant monetary penalty will apply therefore the monetary penalty will apply therefore the lease is deemed to be non-cancellablelease is deemed to be non-cancellable2.2.Is ownership to be transferred at e

49、nd of the Is ownership to be transferred at end of the lease term?lease term?nNo C Ltd expects to return the asset to No C Ltd expects to return the asset to the lessorthe lessor3.3.Does the term of the lease cover a major part of Does the term of the lease cover a major part of the assets economic

50、life?the assets economic life?nThe lease term is for 67% of the economic The lease term is for 67% of the economic life of the asset (4/6 years)life of the asset (4/6 years)nUnlikelyUnlikely that this would be considered to be that this would be considered to be a major part of the assets lifea majo

51、r part of the assets lifeAs per section 14.3.1 of textText book uses 75% as a benchmarkClassification Of Lease: ExampleClassification Of Lease: Example4.4.Does the PV of MLP represent substantially the FV of Does the PV of MLP represent substantially the FV of the asset?the asset?n(85,457/(89,721 +

52、1,457) = 93.7%(85,457/(89,721 + 1,457) = 93.7%nThis represents substantially all the FV of the This represents substantially all the FV of the lease asset.lease asset.5.5.Does the lessee bear substantially all ownership Does the lessee bear substantially all ownership risks and rewards?risks and rew

53、ards?nIt appears so, as the costs of insurance, It appears so, as the costs of insurance, maintenance etc lie with the lessee. maintenance etc lie with the lessee. Conclusion: Conclusion: In spite of the mixed signals above, the lease In spite of the mixed signals above, the lease should be classifi

54、ed as a finance lease as should be classified as a finance lease as substantially all the risks and rewards of ownership substantially all the risks and rewards of ownership pass to the lesseepass to the lesseeTextbook uses 90% as a benchmarkClassification Of Lease: ExampleFinancial statement impact

55、 of a finance leaseFor the lesseeFor the lessee1.PPE increased1.PPE increased2.Liabilities 2.Liabilities increasedincreased3.Interest expense 3.Interest expense recognized recognized 4.Depreciation expense 4.Depreciation expense recognizedrecognizedFor the For the lessorlessor1.1.Leased asset Leased

56、 asset decreaseddecreased2.Receivable 2.Receivable increaseincrease3.Revenue recognized3.Revenue recognizedIncentives To Misclassify Leases Divergent accounting treatments provide an Divergent accounting treatments provide an incentive to misclassify leases as operating incentive to misclassify leas

57、es as operating leasesleasesClassification as a finance lease may have Classification as a finance lease may have the following adverse impacts on a lessees the following adverse impacts on a lessees financial statements:financial statements:Increases non-current assets Increases non-current assets

58、thus thus reducing return on asset ratiosreducing return on asset ratiosIncreases non-current liabilities Increases non-current liabilities adversely affecting debt/equity ratiosadversely affecting debt/equity ratiosDepreciation and interest charges may Depreciation and interest charges may exceed l

59、ease payment in early years of exceed lease payment in early years of lease lease resulting in lower profitsresulting in lower profitsIncentives To Misclassify Leases In an attempt to avoid misclassification In an attempt to avoid misclassification of leases as operating leases additional of leases

60、as operating leases additional guidance is contained within the following:guidance is contained within the following:SIC 27 -SIC 27 - Evaluating the Substance of Evaluating the Substance of Transactions Involving the Legal Form of Transactions Involving the Legal Form of a Leasea LeaseInterpretation 4 -Inte