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Pert 13-14_Ch 21
Pert 13-14_Ch 21
Pert 13-14_Ch 21
Coby Harmon
University of California, Santa Barbara
Westmont College
AKUNTANSI KEUANGAN
II
Dosen:
Dr. Molina, SE., M. Si., Ak., CA
CHAPTER 21
Accounting for Leases
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the environment 3. Explain the accounting for
related to leasing transactions. leases by lessors.
2. Explain the accounting for 4. Discuss the accounting and
leases by lessees. reporting for special features
of lease arrangements.
PREVIEW OF CHAPTER 21
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
LEARNING OBJECTIVE 1
The Leasing Environment Describe the environment
related to leasing transactions.
LO 1
ILLUSTRATION 21.2
What Do Companies
Lease?
The Leasing Environment
Advantages of Leasing—Lessees
1. 100% financing at fixed rates.
2. Protection against obsolescence.
3. Flexibility.
4. Less costly financing.
LO 1
The Leasing Environment
LO 1
The Leasing Environment
Advantages of Leasing—Lessor
1. Often provides profitable interest margins.
2. It can stimulate sales of a lessor’s product.
3. It often provides tax benefits to various parties in the
lease.
4. It can provide a high residual value to the lessor.
LO 1
LEARNING OBJECTIVE 2
Lease Accounting Explain the accounting for
leases by lessees.
Only exceptions:
leases covering a term of less than one year or
lease of property with a value less than $5,000.
LO 2
Lease Accounting
The lessee
recognizes interest expense on the lease liability using
the effective-interest method and
records depreciation expense on the right-of-use asset.
LO 2
Measurement of the Lease Liability and
Lease Asset
Lease Term
The fixed, non-cancelable term of the lease.
Bargain-renewal option can extend this period.
At the commencement of the lease, the
difference between the renewal rental and the
expected fair rental must be great enough to
make exercise of the option to renew reasonably
certain.
LO 2
Lease Term
LO 2
Measurement of the Lease Liability and
Lease Asset
Lease Payments
Fixed payments.
Variable payments that are based on an index or a
rate.
Guaranteed residual value.
Payments related to purchase or termination
options that the lessee is reasonably certain to
exercise.
LO 2
Measurement of the Lease Liability and
Lease Asset
Discount Rate
Lessee should compute the present value of the lease
payments using the implicit interest rate.
► This rate, at commencement of the lease, which causes
the aggregate present value of the lease payments and
unguaranteed residual value to be equal to the fair value
of the leased asset.
LO 2
Terms and provisions of the lease agreement:
• The term of the lease is five years. The lease agreement is non-
cancelable, requiring equal rental payments of €20,711.11 at the
beginning of each year (annuity-due basis).
• The backhoe has a fair value at the commencement of the lease of
€100,000, an estimated economic life of five years, and a
guaranteed residual value of €5,000. (Ivanhoe expects that it is
probable that the expected value of the residual value at the end of
the lease will be greater than the guaranteed amount of €5,000.)
• The lease contains no renewal options. The backhoe reverts to
CNH Capital at the termination of the lease.
• Ivanhoe’s incremental borrowing rate is 5 percent per year.
• Ivanhoe depreciates its equipment on a straight-line basis.
• CNH sets the annual rental rate to earn a rate of return of 4 percent
per year; Ivanhoe is aware of this rate.
LO 2
Lessee Accounting: Example 1
Payment € 20,711.11
Present value factor (i=4%,n=5) x 4.62990
PV of lease payments €95,890.35 *
* Rounded by €0.02. LO 2
Lessee Accounting: Example 1
LO 2
ILLUSTRATION 21.7
Lease Amortization Schedule—Lessee
LO 2
ILLUSTRATION 21.7
* rounding LO 2
Lessee Accounting: Example 1
LO 2
Lessee Accounting: Example 1
* rounding LO 2
ILLUSTRATION 21.7
Equipment 5,000
Cash 5,000
* rounding LO 2
Lessee Accounting: Example 2
LO 2
Lessee Accounting: Example 2
Payment € 20,711.11
Present value factor (i=4%,n=5) x 4.62990
PV of lease payments € 95,890.35 *
Probable residual value € 2,000,00
PV factor (i=4,n=5) x .82193
PV of probable residual value 1,643.86
Lessee’s lease liability/right-of-use asset € 97,534.21
* Rounded by €0.02. LO 2
Lessee Accounting: Example 2
Ivanhoe makes the following entries to record the lease and the
first payment on January 1, 2019, as:
LO 2
ILLUSTRATION 21.11
Lease Amortization Schedule—Lessee
LO 2
ILLUSTRATION 21.12
Journal Entries—Guaranteed Residual Value
LO 2
Example 2: Residual Value Loss
LO 2
Lessee Accounting: Example 3
LO 2
Lessee Accounting: Example 3
The present value of the lease payments for M&S in this situation
is £49,924.56 (£17,620.08 × 2.83339 (PVF = AD 3,6%)).
January 1, 2019
Right-of-Use Asset 49,924.56
Lease Liability 49,924.56
LO 2
ILLUSTRATION 21.15 Journal Entries by Lessee LO 2
Low-Value and Short-Term Leases
LO 2
LEARNING OBJECTIVE 3
Lessor Accounting Explain the accounting for
leases by lessors.
Economics of Leasing
Lessor determines the amount of the rental payment, not
the lessee.
Determines payment using rate of return (implicit rate).
Considers credit standing of lessee.
Length of the lease.
Status of the residual value (guaranteed versus
unguaranteed).
LO 3
Lessor Accounting
Economics of Leasing
In Examples 1 and 2, CNH determined the implicit rate to be 4
percent, the fair value of the equipment to be €100,000, and the
residual value to be $5,000. CNH then computes the lease
payment as shown.
LO 3
For a finance lease,
• must be non-
cancelable and
• meet at least one
of the five tests.
ILLUSTRATION 21.218
Lease Classification Tests
LO 3
Classification of Leases by the Lessor
LO 3
Classification of Leases by the Lessor
LO 3
Classification of Leases by the Lessor
LO 3
Classification of Leases by the Lessor
Lease Payments
Generally include:
1. Fixed payments.
2. Variable payments.
LO 3
Classification of Leases by the Lessor
Discount Rate
Implicit rate should be used to determine the
present value of the payments.
Defined as the discount rate that, at
commencement of the lease, causes the
present value of the lease payments and
unguaranteed residual value to be equal to the
fair value of the leased asset.
LO 3
Alternative Use Test
If at the end of the lease term the lessor does not have
an alternative use for the asset, the lessee classifies the
lease as a finance lease.
The assumption is that the lessee uses all the benefits
from the leased asset and therefore the lessee has
essentially purchased the asset.
LO 3
Classification of Leases by the Lessor
ILLUSTRATION 21.19 LO 3
Finance (Sales-Type) Lease Example
ILLUSTRATION 21.20
Lease Payment Calculation
LO 3
Finance (Sales-Type) Lease Example
LO 3
Finance (Sales-Type) Lease Example
ILLUSTRATION 21.23
Lease Amortization Schedule
LO 3
ILLUSTRATION 21.23
ILLUSTRATION 21.24
Balance Sheet
Presentation
ILLUSTRATION 21.25
Income Statement
presentation
LO 3
ILLUSTRATION 21.23
* rounding LO 3
ILLUSTRATION 21.23
Inventory 5,000
Lease Receivable 5,000
* rounding LO 3
Lessor—Guaranteed Residual Value
LO 3
Lessor—Unguaranteed Residual Value
ILLUSTRATION 21.27
Computation of Lease Amounts by CNH—Sales-Type Lease
LO 3
ILLUSTRATION 21.28
Entries for Guaranteed and Unguaranteed Residual Values — Sales-Type Lease LO 3
Lessor Accounting for Operating Leases
ILLUSTRATION 21.30
Lease Classification Tests
LO 3
Lessor Accounting for Operating Leases
LO 3
Lessor Accounting for Operating Leases
Cash 17,620.08
Unearned Lease Revenue 17,620.08
LO 3
Lessor Accounting for Operating Leases
LO 3
LEARNING OBJECTIVE 4
Special Lease Discuss the accounting and
reporting for special features of
Accounting Problems lease arrangements.
LO 4
Special Lease Accounting Problems
LO 4
Special Lease Accounting Problems
LO 4
Special Lease Accounting Problems
LO 4
Special Lease Accounting Problems
ILLUSTRATION 21.35
Presentation in Financial Statements—Lessee
LO 4
Presentation, Disclosure, and Analysis
Presentation
Summary of how the lessor reports the information related to
sales-type and operating leases in the financial statements.
ILLUSTRATION 21.36
Presentation in Financial Statements—Lessor
LO 4
Presentation, Disclosure, and Analysis
Disclosure
Lessees and lessors must also provide additional qualitative and
quantitative disclosures to help financial statement users assess
the amount, timing, and uncertainty of future cash flows. Qualitative
disclosures to be provided by both lessees and lessors are
summarized as shown.
ILLUSTRATION 21.37
Qualitative Lease Disclosures
LO 4
Presentation, Disclosure, and Analysis
Disclosure
This illustration presents the type of quantitative information that
should be disclosed for the lessee.
ILLUSTRATION 21.38
Lessee Quantitative Disclosures
LO 4
Presentation, Disclosure, and Analysis
Disclosure
This illustration presents the type of quantitative information that
should be disclosed for the lessor.
ILLUSTRATION 21.40
Lessor Quantitative Disclosures
LO 4
Presentation, Disclosure, and Analysis
Analysis
With the increase in the assets and liabilities, a number of financial
metrics used to measure the profitability and solvency of
companies will change.
• Return on assets will decrease.
• Earnings before interest, taxes, and depreciation and
amortization (EBIDTA), which likely will require some
adjustments as companies depreciate right-of-use assets and
record interest expense.
• Debt to equity ratio will increase, and the interest coverage ratio
will decrease.
LO 4
APPENDIX 21A Sale-Leasebacks
LEARNING OBJECTIVE 5
Describe the lessee’s accounting for sale-leaseback transactions.
LO 5
APPENDIX 21A Sale-Leasebacks
LO 5
APPENDIX 21A Sale-Leasebacks
LO 5
APPENDIX 21A Sale-Leasebacks
LO 5
APPENDIX 21A Sale-Leasebacks
Sale Transaction
In a sale, gain or loss recognition is appropriate. Darden
then records the transaction as follows.
1. Increases cash and reduces the carrying value of the
asset to zero (referred to as derecognizing the asset).
LO 5
APPENDIX 21A Sale-Leasebacks
Sale Transaction
For example, assume that Stora Enso (FIN) sells one of its
buildings having a carrying value of €580,000 (building
€800,000 less accumulated depreciation €220,000) to
Deutsche Bank (DEU) for €623,110. It then leases the
building back from Deutsche Bank for €50,000 a year, for eight
of the building’s 15 years of remaining economic life. Assume
that the present value of these lease payments is equal to
€310,000, such that the lease is classified as an operating
lease by Deutsche Bank.
LO 5
APPENDIX 21A Sale-Leasebacks
Sale Transaction
Stora Enso makes the following entries to record the sale-
leaseback.
Cash 623,110
Accumulated Depreciation—Buildings 220,000
Buildings 800,000
Gain on Disposal of Plant Assets 43,110
(€623,110 − €580,000)
LO 5
APPENDIX 21A Sale-Leasebacks
Sale Transaction
In addition, Stora Enso makes an entry to record the operating
lease from Deutsche Bank as follows.
LO 5
APPENDIX 21A Sale-Leasebacks
Sale-Leaseback Example
Japan Airlines (JAL) (JPN) on January 1, 2019, sells a used Boeing 757 having a
carrying amount on its books of $30,000,000 to CitiCapital for $33,000,000. JAL
immediately leases the aircraft back under the following conditions:
• The term of the lease is seven years. The lease agreement is non-
cancelable, requiring equal rental payments of $4,881,448 at the end of
each year (ordinary annuity basis), beginning December 31, 2019.
• The lease contains no renewal or purchase options. The plane reverts to
CitiCapital at the termination of the lease.
• The aircraft has a fair value of $33,000,000 on January 1, 2019, and an
estimated remaining economic life of 10 years. The residual value
(unguaranteed) at the end of the lease is $13,000,000.
• The annual payments assure the lessor an 8 percent return (which is the
same as JAL’s incremental borrowing rate).
LO 5
Sale-Leaseback Example
Applying the classification tests, the lease-back of the airplane is
classified as an operating lease because none of the sales-type
lease criteria are met, as indicated in Illustration 21A.3.
ILLUSTRATION 21A.3
Lease Classification Tests
LO 5
Sale-Leaseback Example
This arrangement is accounted for as a sale because the
leaseback does not transfer control of the asset back to JAL; only
the right-of-use for seven years is granted through the lease.
ILLUSTRATION 21A.4
Comparative Entries for Sale-Leaseback for Lessee and Lessor
LO 5
ILLUSTRATION 21A.4
Comparative Entries for Sale-Leaseback for Lessee and Lessor
LO 5
APPENDIX 21B DIRECT FINANCING LEASE (LESSOR)
LEARNING OBJECTIVE 6
Apply lessee and lessor accounting to finance and operating leases.
LO 6
Lease Terms: Scenario 1
ILLUSTRATION 21B.2
Lease Classification Tests
LO 6
Lease Terms: Scenario 1
Lessee/Lessor Accounting
*Rounded by €0.06.
ILLUSTRATION 21B.3
Lease Liability Amortization Schedule
LO 6
Scenario 1
ILLUSTRATION 21B.4
Lessee/Lessor Entries for Finance/Sales-Type Lease
LO 6
Scenario 1
ILLUSTRATION 21B.4
Lessee/Lessor Entries for Finance/Sales-Type Lease
LO 6
Scenario 1
ILLUSTRATION 21B.4
Lessee/Lessor Entries for Finance/Sales-Type Lease
LO 6
Lease Terms: Scenario 2
ILLUSTRATION 21B.6
Lease Classification Tests
LO 6
Lease Terms: Scenario 2
Lessee Accounting
Parker makes the following entry to record this lease and the first
payment.
January 1, 2019
LO 6
Lease Terms: Scenario 2
Lessee Accounting
*Rounded by €0.02.
ILLUSTRATION 21B.7
Lease Amortization Schedule—Lessee
LO 6
Scenario 2
ILLUSTRATION 21B.8
Lessee Entries for Finance Lease
LO 6
Scenario 2
ILLUSTRATION 21B.8
Lessee Entries for Finance Lease
LO 6
Scenario 2
ILLUSTRATION 21B.8
Lessee Entries for Finance Lease
LO 6
Scenario 2
ILLUSTRATION 21B.8
Lessee Entries for Finance Lease
LO 6
Scenario 2
ILLUSTRATION 21B.9
Lessor Entries for Operating Lease
LO 6
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