LEASES

 LESSEE ACCOUNTING
 SALE AND LEASEBACKS
 LESSOR ACCOUNTING
 ASPE
Annual Report Questions
 Lets review the annual report
questions!!
Lessee
 Identification of a Lease
 Exemptions
 Non-lease components
 Impact on financial statements

SLIDE 6-25
Lessee
 Identification of a Lease
 At inception of the contract, need to
determine if contract contains lease
 In order to be considered a lease:
 Right to control
 Specifically identified asset
 Specified period of time

SLIDE 6-26
Lessee
 Exemptions
 Short-term leases
 less than year
 If renewal option consider if likely to
renew
 no purchase option
 Low value assets
 based on value new asset (less than
$5,000 US)
 not dependent on or related other assets

SLIDE 6-27
Lessee
 If meet exemption option to elect to recognize
as lease expense each period instead of
recognizing right-of-use asset and lease
liability

Rent Expense xxx

Cash xxx

SLIDE 6-27
Examples
 Lease used vehicle value $3,000
 Lease office space 8 months
 Lease employee laptop $2,500 new
 Lease large piece machinery with purchase
option
 Lease office space for 1 year with option to
renew
Which of the following examples would qualify
for an exemption?
Lessee
 Non-Lease Components
 If the lease contract includes non-
lease components (ie. Maintenance)
two options:
 Separate out servicing portion
based on stand alone fair value; or
 Option to treat entire contract as a
lease

SLIDE 6-26
Lessee
 Accounting by Lessees – Initial
Recognition
 Recognize “right of use” asset and
liability on commencement date –
when asset available for use

SLIDE 6-28
Lessee
 Accounting by Lessees – Initial Recognition
 Lease liability recorded at PV of lease
payments
 Payments include:
 Fixed payments over lease term
 Variable payments if linked to index or
rate (not if linked to sales or usage)
 Residual guarantee if expect to pay
 Purchase option if expect to exercise
 Termination penalty if lease term
suggests will exercise
SLIDE 6-28
Example
 Lease payment $5,000 per month 3 year
lease
 Car lease payment $0.20 per km
 Residual value guarantee $20,000
 Lease payment 2% of sales
 Purchase option at end of 5 year lease
 Lease payment linked to CPI index
Which of the following payments would be
included in PV of lease liability?
Lessee
 Accounting by Lessees – Initial
Recognition Lease Liability
 Lease term includes:
 Non-cancellable term
 Options to extend if reasonably certain
 Consider economic incentives to
extend
 Rent –free periods

SLIDE 6-28
Lessee
 Accounting by Lessees – Initial
Recognition Lease Liability
 Interest rate for discounting is:
 Lessor’s Rate Implicit in the Lease if
Known by Lessee; if not known
 Lessee’s Incremental Borrowing Rate
(Lessee Would Need to Pay if
Financed by Another Source)

SLIDE 6-28
Lessee
 Accounting by Lessees – Initial
Recognition
 Right-of-use asset recorded at total
of:
 Starting point amount lease liability
 Lease payments made at or before
commencement date
 Initial direct costs
 Estimated decommissioning liabilities
 Less any lease incentives received
SLIDE 6-28
Lessee
 Amount recorded as lease liability will
not necessarily be equal to the
amount of right-of-use asset
 Amount of lease liability is the
starting point for measurement right-
of-use asset
Example – Part 1
 5 year lease starting Jan 1, 20X6
 $100,000 per year plus 1% of sales in
period
 Implicit rate not know incremental
borrowing rate 5%
 Straight-line depreciation
 Lease payment end of year
 Dec 31 year-end
What is amount ROU asset and lease liability
at inception lease?
Example – Part 2
How would journal entry change if?
 Part 1 - Initial legal costs of $5,000 to
obtain lease OR
 Part 2 - Decommissioning costs of
$50,000 (PV) required by lease
contract?
Lessee
 Subsequent Measurement of Right-of-use Asset
 Cost model
 Initial measurement less:
 Accumulated depreciation earlier end
useful life or lease term unless transfer
ownership then useful life
 Accumulated impairment
 Plus or less remeasurement lease
liability
 Also option to use revaluation model or fair
value model if those criteria are met
SLIDE 6-28
Lessee
 Subsequent Measurement of Lease Liability
 Adjust for:
 Interest expense using effective interest
method
 Discount rate does not change unless
 Change in lease term
 Change in amount payable purchase
option
 Payments made
 Remeasurements if variable lease
payments linked to index or rate change
or there are substantial modifications to
lease

SLIDE 6-28
Lessee
 Any remeasurements e.g. change in
CPI index if payment linked to CPI
index lease liability will also adjust
amount of right-of-use asset
 Also need to adjust interest and
amortization expense based on new
information

SLIDE 6-28
LESSEE
 Each year (if no remeasurements):
 Record interest to bring up liability to
face value
 DR. Interest expense and CR. Lease
liability
 Record payments on lease
 DR. Lease liability and CR. Cash
 Record amortization of asset
 DR. Amortization expense and CR.
Accumulated am.
Example – Part 3
Using information from Part 1 what are
journal entries in 20X6 if sales were $2
million?
Initial entry was:
ROU Asset 432,948
Lease liability 432,948
5 year lease
Payment 1% sales
IFRS- STEPS
 STEP 1 – Initial Entry (assuming no
other adjustments right-of-use asset)
 DR. ROU Asset = PVMLP
 CR. Lease liability = PVMLP
 STEP 2 – Accrue interest (assuming
no remeasurements)
 DR. Interest expense
 CR. Lease liability
 = Liability @ beginning of year x interest
rate
IFRS - STEPS
 STEP 3 – AMORTIZE ASSET
(assuming no remeasurements)
 DR. Amortization exp
 CR. Accumulated amortization
 STEP 4 – RECOGNIZE PAYMENTS
 DR. Lease liability
 CR. Cash
 STEP 5 – CALCULATE CLOSING
BALANCE OF LEASE LIABILITY
 Opening bal + interest - payment
Lessee
 Presentation by Lessee
 Presentation on Statement of
Financial Position
 Lease liabilities separate line item split
into current and non-current
 Right-of-use assets together with
property, plant and equipment or as
separate line item

SLIDE 6-29
Lessee
 Presentation by Lessee
 Presentation on Income Statement
 Separate line items for amortization of
lease assets and interest on lease
liability

SLIDE 6-29
Lessee
 Presentation by Lessee
 Presentation on Cash Flow Statement
 Operating activities – lease payments
if meet exemption, variable lease
payments linked to sales or usage
 Principal payments financing activity
 Interest paid consistent with other
interest paid

SLIDE 6-29
ASPE - LESSEE
 Operating lease
 Show Lease Expense Each Period
 Capital lease
 Show Asset and Liability on B/S
 Asset and Liability Recorded at PV of
Lease Payments
 Recognize Amortization Expense for
Asset and Interest Expense on Liability
ASPE - OPERATING LEASE
 Lessee records periodic lease payments
(same as if exemption IFRS)
Rent Expense xxx
Cash xxx
 Lessor records periodic receipts of rent
Cash xxx
Rent Revenue xxx
ASPE - INITIAL COSTS
 Pay specified costs relating to leased
asset e.g. delivery and construction
 Lessee charges to rent (lease)
expense
 In IFRS these were added to initial
measurement of right-of-use asset
ASPE - UNEVEN PAYMENTS
 Lessor may provide free rent or
require lump sum payment @
beginning of lease
 These payments are amortized over
initial lease term
 Ex. Free rent for 1 year. Remaining 2
years are $1500 per year.
ASPE - UNEVEN PAYMENTS
 Step 1 – Calculate SL rent
 $1500 x 2 y / 3 y = $1000 per year
 Step 2 – Entry in Year 1
 DR. Rent expense 1000
 CR. Deferred rent liability 1000
 Step 3 – Entry in Years 2 & 3
 DR. Rent expense 1000
 DR. Deferred rent liability 500
 CR. Cash 1500
ASPE - CAPITAL LEASES -
LESSEE
 Basic Criteria:
 “Do the Terms of the Lease Transfer
Substantially all the Risks and Rewards
of Ownership From the Lessor to Lessee”
 Normally transferred if at least 1
criteria met
 Also consider other factors, such as
insurance and nature of lessor
CRITERIA - ASPE
 Automatic transfer of title
 Bargain purchase option
 Lease term is 75% or more of the
asset’s economic life
 PV of minimum lease payments is at
least 90% of the FV of the asset @
inception of the lease
ASPE - LEASE TERM
 Includes:
 All terms prior to exercise date of
bargain purchase option – assume lessee
would keep asset so can exercise BPO
 Bargain renewal term – option to extend
lease payments @ substantially less than
market price
 All renewal terms at lessor’s option –
assume lessor would exercise because
do not want asset returned
ASPE - MINIMUM LEASE
PAYMENTS
 Exclude operating/executory costs (i.e.
insurance or maintenance)
 Include guaranteed residual value –
amount lessee guaranteed that lessor will
receive on sale of asset @ end of term
 Include bargain purchase price
 Exclude contingent lease payments which
are based on subsequent events (i.e. fee
per km) – cannot estimate
ASPE - INTEREST RATE
 Interest rate for discounting is lower
of:
 Lessor’s Rate Implicit in the Lease
if Known by Lessee;
 Lessee’s Incremental Borrowing
Rate (Lessee Would Need to Pay if
Financed by Another Source)
ASPE – EXAMPLE – PART 1
On Jan 1, 2020 ABC Inc. signed a 5 year lease
with XYZ Inc. for office equipment. The lease calls
for $6,000 per year, payable at the beginning of
each year (Jan 1).
The equipment has a remaining useful life of 7
years and had a FMV of $26,900. The equipment
returns to XYZ at the end of the lease, unless ABC
buys the equipment for $4,500, the expected
residual value. The incremental borrowing rate is
8%.
Is this capital or operating lease?
ASPE - FAIR VALUE CEILING
 If record as capital lease, record asset
= PVMLP
 The asset cannot be recorded at an
amount > FMV
 Asset is capped @ FMV
 Need to calculate implicit interest rate
based on remaining inputs
 Accrete liability based on new
calculated interest rate
ASPE - CAPITAL LEASES -
LESSEE
 Steps ASPE and IFRS same if no
remeasurements
 At inception of lease:
 Record the asset as if it was
purchased through debt @ PVMLP
(max of FMV of asset)
 DR. Asset
 CR. Lease liability
ASPE - CAPITAL LEASES -
LESSEE
 Each year:
 Record interest to bring up liability to
face value
 DR. Interest expense and CR. Lease
liability
 Record payments on lease
 DR. Lease liability and CR. Cash
 Record amortization of asset
 DR. Amortization expense and CR.
Accumulated am.
ASPE EXAMPLE – PART 2
 Using information from Part 1 provide
journal entries for year
 Payment beginning of year
 PV is 25,873
ASPE - F/S IMPACTS OF LEASE
 I/S – Amortization & interest expense
 B/S – Asset & Accumulated
amortization, Lease liability – current
and noncurrent portion
 DISCLOSURE – commitment of future
lease payments for next 5 years
individually and in total
ASPE - CALCULATING
AMORTIZATION
 Term of amortization
 If no BPO or title transfer  over
lease term
 If BPO or title transfer  over life of
asset
 Depreciable amount
 PV minus guaranteed residual value
OTHER COMPLICATIONS – ASPE
and IFRS - INTEREST EXPENSE
 Interest payments may not coincide with
lease term, so need to accrue @ year end
 At year end:
Interest expense xx
Lease liability xx
 When payment made:
Interest expense xx
Lease liability xx
Cash xx
OTHER COMPLICATIONS –ASPE and
IFRS - RESIDUAL VALUE

 If lessor sells asset at end lease for

less than guaranteed residual value
(ASPE) or expected payments
residual value (IFRS) lessee needs to
make up difference
 Difference is loss
Loss on lease termination xx
Cash xx
IFRS – SALE AND LEASEBACK
 Step 1 – Determine is sale based on
IFRS 15
 Performance obligation satisfied
 Transfer control
 Step 2 – If sale lessee
 ROU asset based previous carrying
amount
 Recognize gain or loss
IFRS – SALE AND LEASEBACK
 Step 2 – If sale lessor
 Determine if finance or operating lease
 Apply lessor accounting
ASPE - SALE LEASEBACK
 Step 1 – Assess if leaseback is a capital
or operating lease
 Step 2 – Determine how to account for
gain or loss
 Step 3 – Record the sale
 Step 4 – Record the lease
ASPE - SALE LEASEBACK
 On the sale of the asset, a gain or loss is
created
 Need to assess whether capital or
operating lease first because has impact
on how to account for the gain or loss
SALE LEASEBACK ASPE – ACTG
FOR GAIN OR LOSS
Scenario Treatment

Capital and operating lease Loss recognized immediately because

where FV < book value at the represents impairment
time of the sale
Operating lease in all other Defer gain/loss and amortize over the lease
situations payments proportionately

Capital lease in all other Defer and amortize proportionately to the

situations depreciation of leased asset
SALE AND LEASEBACK
Assume ASPE if a capital lease
 Record the sale
 DR. Cash xx
 DR. Accum. Depreciation xx
 CR. Building xx
 CR. Deferred gain xx
 Record the lease
 DR. Lease asset xx
 CR. Lease liability xx
SALE AND LEASEBACK
Assume ASPE capital lease
 Each year – Amortize the asset
 DR. Depreciation expense xx
 CR. Accumulated depreciation xx
 Each year – Amortize the deferred gain
 DR. Deferred gain xx
 CR. Depreciation expense xx
IFRS - OTHER ISSUES
 IFRS lessee - leases land and buildings
 Not an issue for lessee since would not
separate entire lease would be ROU
asset and lease liability
 Land and buildings would not qualify for
exemption
OTHER ISSUES
 Leases land and buildings (IFRS lessor
and ASPE)
 Land usually operating lease but building
may be capital or operating
 If portion related to land is immaterial
report as a whole
 IFRS - segregate based fair value
leasehold rights (FV of benefits
transferred to lessee)
 ASPE – based on FV of properties
IFRS - LESSOR ACCOUNTING
 Lessor needs to determine if
operating or finance lease
 Based on transfer risks and rewards
 If one of primary criteria met then
finance lease
 Assess if lease modification
IFRS - CRITERIA
 Primary criteria for finance lease:
 Ownership transferred @ end lease or
bargain purchase option
 Lease term covers major part economic
life
 PV of minimum lease payments covers
substantially all of fair value
 Asset so specific to lessee that another
lessee could not use it without
substantial modifications
IFRS - CRITERIA
 Other secondary conditions that
might lead to finance lease:
 Losses from cancellation of lease by
lessee are borne by lessee
 Gains and losses from changes in value
accrue to lessee at end lease
 The lessee is able to extend lease for
another period at less than market
value, “bargain renewal”
IFRS - OPERATING LEASE -
LESSOR
 Leased asset shown lessor’s f/s
 Asset is amortized
 Initial direct costs added to carrying
amount asset
 Other costs expensed
 Lease revenue recognized as
payments due
IFRS - FINANCE LEASES -
LESSOR
 Direct financing
 Lessor Financial Intermediary –
Purchases an Asset Which is Immediately
Leased to Lessee
 Profit Comes From Lease Interest
 Sales type (manufacturers)
 Lessor Leases Property to Lessee From
Inventory
 Revenue as if Property Sold
ASPE - CRITERIA FOR CAPITAL
LEASE
 Step 1 – need to meet at lease 1 of
criteria used for lessee
 Step 2 – need to meet 2 additional
criteria:
 Credit risk of lessee must be normal
 Unreimbursable costs to be borne
by lessor must be estimable
INTEREST RATE DISCOUNTING
FOR FINANCE / CAPITAL LEASE
 Both ASPE and IFRS
 Interest rate for discounting is rate
implicit in lease (would be known)
Next Class
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