TAILIEUCHUNG - Lecture Intermediate accounting - Chapter 15: Leases

In this chapter we continue our discussion of debt, but we now turn our attention to liabilities arising in connection with leases. Leases that produce such debtor/creditor relationships are referred to as capital leases by the lessee and as either direct financing or sales-type leases by the lessor. We also will see that some leases do not produce debtor/creditor relationships, but instead are accounted for as rental agreements. | Leases Chapter 15 Chapter 15: Leases In this chapter we continue our discussion of debt, but we now turn our attention to liabilities arising in connection with leases. Leases that produce such debtor/creditor relationships are referred to as capital leases by the lessee and as either direct financing or sales-type leases by the lessor. We also will see that some leases do not produce debtor/creditor relationships, but instead are accounted for as rental agreements. Accounting by the Lessor and Lessee A lease is an agreement in which the lessor conveys the right to use property, plant, or equipment, usually for a stated period of time, to the lessee. Lessor = Owner of property Lessee = Renter The lessee receives the beneficial use of property in the lease. The lessor owns the property, and the lessee is the party who uses the assets and makes lease payments. From the perspective of the lessee, we have two types of leases. The first type of lease is referred to as an operating lease, and the second is known as a capital lease. We view a capital lease as an in-substance purchase of an asset. From the perspective of the lessor, we have three types of leases. We have an operating lease, a direct-financing lease, and a sales-type lease. Classification Criteria Ownership transfers to the lessee at the end of the lease term, or . . . A bargain purchase option (BPO) exists, or . . . The noncancelable lease term is equal to 75% or more of the expected economic life of the asset, or The PV of the minimum lease payments is 90% or more of the fair value of the asset. A capital lease must meet one of four criteria: Operating Lease Capital Lease A lease is accounted for as either a rental agreement (known as an operating lease) or a purchase/sale accompanied by debt financing (known as a capital lease). The choice of accounting method hinges on the nature of the leasing arrangement. From the viewpoint of the lessee, a capital lease must meet one of the four following conditions:

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• Intermediate accounting
• Lecture Intermediate accounting
• Financial Accounting
• Lease classifications
• Capital lease classification
• Operating leases
• Accounting process
• Accounting equation
• Accounting processing cycle
• Stock issuance
• Estimating reserves
• Liquidating dividends
• Accounting changes
• Error corrections
• Accounting choices
• Theoretical structure
• Accrual accounting
• Financial accounting environment
• Accounting for leases
• Leasing environment
• Accounting by lessee
• Special accounting problems
• Cash versus accrual accounting
• International standard setting
• Accounting standards
• Accounting assists
• The challenges facing accounting
• Income taxes
• Accounting for income taxes
• Deferred tax liabilities
• Error analysis
• Accounting policy
• Accounting estimate
• Accounting policies
• Financial reporting
• Accounting information system
• Measurement issues
• Characteristics of accounting
• Capital allocation process