*This material is dealt 0ith in an A55endi6 to the cha5ter
78TE& If your students are sol9ing the end4of4cha5ter material using a financialcalculator or an E6cel s5readsheet as o55osed to the 3: ta(les, 5lease note thatthere 0ill (e a difference in amounts E6cel and financial calculators yield a more5recise result as o55osed to 3: ta(les The amounts used for the 5re5aration of
;ournal entries in solutions ha9e (een 5re5ared from the results of calculationsarri9ed at using the 3: ta(les
3".411 %essee4lessor entries' statement of financial5osition and cash flo0 5resentation' sales4ty5elease
Moderate #)4$)
3".41" %essee entries and statement of financial
5osition and cash flo0 5resentation' ca5italand o5erating lease
Moderate ")4#)
3".41# %essor calculations and entries' sales4ty5elease 0ith unguaranteed residual 9alue
Com5le6 #)4$)
3".41$ %essee calculations and entries' ca5ital lease0ith guaranteed and unguaranteed residual9alue and (argain o5tion
Com5le6 $.4).
3".41) %essor calculations and entries' sales4ty5elease 0ith guaranteed and unguaranteedresidual 9alue, 0ith disclosure, de5reciationcalculations for lessee
Com5le6 $.4$)
3".41 %essee4lessor accounting for residual 9alue Com5le6 #.4$.
3".41+ Contrasting ca5ital and o5erating lease choice Moderate #.4#)3".41 %ease accounting and re5orting @ o5eratinglease to lessee and ca5ital lease to lessor
Com5le6 $.4$)
3".41- Contract4(ased a55roach, including re9ision of estimates for guaranteed residual 9alue
Moderate #.4#)
3".4". %ease 9s 5urchase including financing,o5tions to 5urchase, contract4(ased a55roachand summaries>lessee
For !/e co"!rc!-bse* pproc/ !/e 5ro(a(ility40eightede65ected 9alue of the residual guarantee must (e used in the 5resent9alue calculation of the lease 5ayments lia(ility
(*)Under IFRS, any one or a combination of the following situationsnormally indicates that the risks and rewards of ownership aretransferred to the lessee, and supports classification as afinance lease:
• There is reasonable assurance that the lessee will obtain
ownership of the leased property by the end of the leaseterm. If there is a bargain purchase option in the lease, it isassumed that the lessee will exercise it and obtainownership of the asset.
• The lease term is long enough that the lessee will receivesubstantially all of the economic benefits that are expectedto be derived from using the leased property over its life.
• The lease allows the lessor to recover substantially all ofits investment in the leased property and to earn a returnon the investment. Evidence of this is provided if the
present value of the minimum lease payments is close tothe fair value of the leased asset.
• The leased assets are so specialized that, without majormodification, and/or significant cost to the lessor, they areof use only to the lessee.
Other indicators include situations where the lessee absorbs thelessor’s losses if the lessee cancels the lease, or the lesseeassumes the risk associated with the amount of the residualvalue of the asset at the end of the lease, or where there is abargain renewal option—when the lessee can renew the leasefor an additional term at significantly less than the market rent.
The standard also states that these indicators are not alwaysconclusive. The decision has to be made on the substance ofeach specific transaction. If the lessee determines that the risksand benefits of ownership have not been transferred to it, thelease is classified as an operating lease.
It is likely the lease would be classified as a capital lease underIFRS.
() T/is is " oper!i"# lese !o o"# si"ce !/e lese !erm (4'ers) is less !/" 849 of !/e eco"omic life (8 'ers) of !/elese* sse!; T/e lese !erm is 8.;>9 (4 5 8) of !/e sse!seco"omic life; T/ere is "o br#i" p&rc/se op!io" "* !/eprese"! %l&e of mi"im&m lese p'me"!s of <4@@>represe"! 829 of !/e fir %l&e ! Sep!ember . of <8@000flli"# s/or! of !/e cri!eri of @09 !o !re! !/e lese s cpi!l lese;
() To Ne1 B' !/e lessee !/is lese is cpi!l lese bec&se!/e !erms s!isf' !/e follo1i"# cri!eri
.; T/e lese !erm is #re!er !/" 849 of !/e eco"omic life of !/e lese* sse! !/! is !/e lese !erm is 8;>9 (44K82)of !/e eco"omic life;
2; T/e prese"! %l&e of !/e mi"im&m lese p'me"!s is#re!er !/" or eJ&l !o @09 of !/e fir %l&e of !/elese* sse! !/! is !/e prese"! %l&e of <.@=4 is @09of !/e fir %l&e of !/e lese* sse! (<.@=4 K <2.400 ?@09)
(b) T/e mi"im&m lese p'me"!s i" !/e cse of resi*&l%l&e #&r"!ee* b' !/e lessee i"cl&*e !/e #&r"!ee*resi*&l %l&e; T/e prese"! %l&e !/erefore is
P of mo"!/l' p'me"! of <>24 for 44 mo"!/s;;;;;; <[email protected] of resi*&l %l&e of <2400;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; .>>
Prese"! %l&e of mi"im&m lese p'me"!s;;;;;;;;;;; <.@=4
(f) Rather than using quantitative factors such as the 75percent and the 90 percent hurdles often referred to as the
bright lines used in ASPE, the IFRS criteria use qualitativefactors to establish whether or not the risks and rewards ofownership are transferred to the lessee, and supportsclassification as a finance lease:1.There is reasonable assurance that the lessee willobtain ownership of the leased property by the end ofthe lease term. If there is a bargain purchase option inthe lease, it is assumed that the lessee will exercise itand obtain ownership of the asset.
2.The lease term is long enough that the lessee will
receive substantially all of the economic benefits thatare expected to be derived from using the leasedproperty over its life.
3.The lease allows the lessor to recover substantially all ofits investment in the leased property and to earn areturn on the investment. Evidence of this is provided ifthe present value of the minimum lease payments isclose to the fair value of the leased asset.
4.The leased assets are so specialized that, without major
modification, they are of use only to the lessee.
None of the numerical thresholds need be applied, as wasthe case in ASPE, and so the treatment of the lease by thelessee would be the same, although it would be referred toas a finance lease, rather than a capital lease.
Additional disclosures 0ould also (e reFuired a(out materiallease arrangements including contingent rents, su(4lease5ayments and lease4im5osed restrictions These do not a55ly inthis case
Rather than using quantitative factors such as the 75percent and the 90 percent hurdles often referred to as thebright lines used in ASPE, the IFRS criteria use qualitativefactors to establish whether or not the risks and rewards ofownership are transferred to the lessee, and supportsclassification as a finance lease:1.There is reasonable assurance that the lessee willobtain ownership of the leased property by the end ofthe lease term. If there is a bargain purchase option inthe lease, it is assumed that the lessee will exercise itand obtain ownership of the asset.
2.The lease term is long enough that the lessee willreceive substantially all of the economic benefits thatare expected to be derived from using the leasedproperty over its life.
3.The lease allows the lessor to recover substantially all ofits investment in the leased property and to earn areturn on the investment. Evidence of this is provided ifthe present value of the minimum lease payments isclose to the fair value of the leased asset.
4.The leased assets are so specialized that, without majormodification, they are of use only to the lessee.
None of the numerical thresholds need be applied, as wasthe case in ASPE, and so the treatment of the lease by thelessee would be the same, although it would be referred toas a finance lease, rather than a direct financing lease.
For Heber! Corporation—(the lessor):Under IFRS, the lease would receive the same treatment asunder ASPE except the criteria need not include the!1ore%e"&e reco#"i!io"-bse* !es!s co"cer"i"# collec!bili!'"* es!im!i"# &"reimb&rsble cos!s; I"s!e* of bei"#referre* !o s sles-!'pe lese !/e lese 1o&l* be referre*!o s fi""ce lesem"&fc!&rer or *eler;
No!e s *e!ermi"e* i" Exercise 20- pr! (b)T/e lese #reeme"! /s br#i" p&rc/se op!io"; T/ecollec!bili!' of !/e lese p'me"!s is reso"bl' pre*ic!ble"* !/ere re "o impor!"! &"cer!i"!ies s&rro&"*i"# !/e cos!s'e! !o be i"c&rre* b' !/e lessor; T/e lese lso J&lifies s cpi!l lese from !/e %ie1poi"! of !/e lessee;
(b) T/is is cpi!l lese !oXusi"ce !/e lese !erm (6 'ers) is#re!er !/" 849 of !/e eco"omic life (6 'ers) of !/elese* sse!; T/e lese !erm is .009 (6 5 6) of !/e sse!seco"omic life; T/is lso mee!s !/e reJ&ireme"!s of IFRS&"*er 1/ic/ i! is referre* !o s financing lease.
T/e prese"! %l&e of !/e mi"im&m lese p'me"!s is
#re!er !/" @09 of !/e fir %l&e of !/e lese* sse! !/!is !/e prese"! %l&e of <.>@@4 is @@9 of !/e fir %l&e of !/e lese* sse! (<.>@@4 K <.000 ? @@;>9); T/iscri!eri for !re!i"# !/e lese s cpi!l lese /s lsobee" me!; No!e !/! mee!i"# &s! o"e of !/e cri!eri iss&fficie"! for clssific!io" s cpi!l lese;
No!e T/is lese is cpi!l lese !o !/e lessee bec&se !/elese !erm (fi%e 'ers) excee*s 849 of !/e eco"omic life of !/esse! (six 'ers); Also !/e prese"! %l&e of !/e mi"im&m lesep'me"!s excee*s @09 of !/e fir %l&e of !/e sse!;
<.6.>2;@4 A""&l re"!l p'me"!, >;.@6 P of " ""&i!' *&e of . for " ? 4 i ? .09<844=;4 P of mi"im&m lese p'me"!s
Excel form&l ?P(r!e"perpm!f%!'pe)
+si"# fi""cil clc&l!or
P < D iel*s <844>
I .09N 4
PMT < (.6.>2;@4)
F < 0
T'pe .
()LeBl"c Limi!e* (Lessee)
Lese Amor!i!io" Sc/e*&le
$!e
A""&lLese
P'me"!
I"!eres!(.09)1
o" +"pi*Obli#!io"
Re*&c!io"
of LeseObli#!io"
Bl"ceof Lese
Obli#!io"
.K.K.>
.K.K.>
.K.K.4
.K.K.
.K.K.8
.K.K.6
<.6.>2;@4 .6.>2;@4 .6.>2;@4
.6.>2;@4 .6.>2;@4<@08.>;84
< 484.;0 >4..;68
=.>6;8
.>@;40 <.40.;.@
<.6.>2;@4 .2=@.;6@ .==.;06
.>@@>;.@ .>@=;>4<844=;4
<844=;4
484.0;. >4..6;82 =.>68;>
.>@=;>4 0;00
Ro&"*i"# error is .4 ce"!s;
1 T/e implici! r!e is "o1" "* is lo1er !/" !/e lesseesi"creme"!l borro1i"# r!e of ..9
(*) Rather than using quantitative factors such as the 75percent and the 90 percent hurdles often referred to as thebright lines used in ASPE, the IFRS criteria use qualitativefactors to establish whether or not the risks and rewards ofownership are transferred to the lessee, and supportsclassification as a finance lease:1.There is reasonable assurance that the lessee willobtain ownership of the leased property by the end ofthe lease term. If there is a bargain purchase option inthe lease, it is assumed that the lessee will exercise itand obtain ownership of the asset.
2.The lease term is long enough that the lessee willreceive substantially all of the economic benefits thatare expected to be derived from using the leasedproperty over its life.
3.The lease allows the lessor to recover substantially all ofits investment in the leased property and to earn areturn on the investment. Evidence of this is provided if
the present value of the minimum lease payments isclose to the fair value of the leased asset.
4.The leased assets are so specialized that, without majormodification, they are of use only to the lessee.
None of the numerical thresholds need be applied, as wasthe case in ASPE, and so the treatment of the lease by thelessee would be the same, although it would be referred toas a finance lease, rather than a capital lease.
As for the note disclosure 5ro9ided in 5art cG a(o9e, additionaldisclosures 0ould also (e reFuired a(out material leasearrangements including contingent rents, su(4lease 5aymentsand lease4im5osed restrictions These do not a55ly in this case
() T/is is cpi!l lese !o Fl'"" si"ce !/e lese !erm is 849( 5 8) of !/e sse!s eco"omic life; I" **i!io" !/e prese"!%l&e of !/e mi"im&m lese p'me"!s is more !/" @09 of !/e fir %l&e of !/e sse!;
T/is is sles-!'pe lese !o L%er' si"ce !/e lese is cpi!l lese !o Fl'"" !/e lessee "* bec&se !/ecollec!bili!' of !/e lese p'me"!s is reso"bl'pre*ic!ble !/ere re "o impor!"! &"cer!i"!iess&rro&"*i"# !/e &"reimb&rsble cos!s 'e! !o be i"c&rre* b'!/e lessor "* !/e fir %l&e of !/e eJ&ipme"! (<.>>000)excee*s !/e lessors cos! (<...000);
(b) Clc&l!io" of ""&l re"!l p'me"!
<.>>000 <000 , 0;4@28? <268.6
>;66@8
Prese"! %l&e of <. ! @9 for perio*s;Prese"! %l&e of " ""&i!' *&e ! @9 for perio*s;
(c) For L%er' Corpor!io" —(the lessee):Rather than using quantitative factors such as the 75percent and the 90 percent hurdles often referred to as thebright lines used in ASPE, the IFRS criteria use qualitativefactors to establish whether or not the risks and rewards ofownership are transferred to the lessee, and supportsclassification as a finance lease:1.There is reasonable assurance that the lessee willobtain ownership of the leased property by the end ofthe lease term. If there is a bargain purchase option inthe lease, it is assumed that the lessee will exercise itand obtain ownership of the asset.
2.The lease term is long enough that the lessee willreceive substantially all of the economic benefits thatare expected to be derived from using the leasedproperty over its life.
3.The lease allows the lessor to recover substantially all ofits investment in the leased property and to earn areturn on the investment. Evidence of this is provided ifthe present value of the minimum lease payments isclose to the fair value of the leased asset.
4.The leased assets are so specialized that, without majormodification, they are of use only to the lessee.
None of the numerical thresholds need be applied, as wasthe case in ASPE, and so the treatment of the lease by thelessee would be the same, although it would be referred toas a finance lease, rather than a direct financing lease.
For Fl'"" Corporation—(the lessor):Under IFRS, the lease would receive the same treatment as
under ASPE except the criteria need not include the!1ore%e"&e reco#"i!io"-bse* !es!s co"cer"i"# collec!bili!'"* es!im!i"# &"reimb&rsble cos!s; I"s!e* of bei"#referre* !o s sles-!'pe lese !/e lese 1o&l* be referre*!o s fi""ce lesem"&fc!&rer or *eler;
() /e" &si"# ASPE bec&se !/e lese !erm is lo"#er !/"849 of !/e eco"omic life of !/e sse! "* !/e prese"! %l&e
of !/e mi"im&m lese p'me"!s is more !/" @09 of !/e fir %l&e of !/e sse! i! is cpi!l lese !o !/e lessee;Ass&mi"# collec!ibili!' of !/e re"!s is reso"bl' ss&re*"o impor!"! &"cer!i"!ies s&rro&"* !/e mo&"! of &"-reimb&rsble cos!s 'e! !o be i"c&rre* b' !/e lessor "*eJ&l cos! "* fir %l&e !o ic!ori Lesi"# !/e lese is *irec! fi""ci"# lese !o !/e lessor;
cpi!l leses ! !/e prese"! %l&e of !/e mi"im&m lesep'me"!s &si"# !/e lessees i"creme"!l borro1i"# r!e or !/e i"!eres! r!e implici! i" !/e lese if i! is lo1er !/" !/ei"creme"!l r!e "* is "o1" !o !/e lessee; T/e lessees*epreci!io" *epe"*s o" 1/e!/er o1"ers/ip !r"sfers !o!/e lessee or if !/ere is br#i" p&rc/se op!io"; If o"e of !/ese co"*i!io"s is f&lfille* *epreci!io" 1o&l* be o%er !/eeco"omic life of !/e sse!; O!/er1ise !/e sse! 1o&l* be*epreci!e* o%er !/e lese !erm; Bec&se bo!/ !/e
eco"omic life of !/e sse! "* !/e lese !erm re !/ree'ers !/e lese* sse! s/o&l* be *epreci!e* o%er !/isperio*;
T/e ic!ori Leasing Corporation— If a lease, in substance,transfers the risks and benefits of ownership of the leasedasset to the lessee (decided in the same way as for BlackCorporation, the lessee) and revenue recognition criteriarelated to collectability and ability to estimate any remainingun-reimbursable costs are met, the lessor accounts for the
lease as either a direct financing or a sales-type lease.Victoria is not a manufacturer or dealer trying to make asale and so the lease will be a direct financing lease toVictoria.
(*) ForBlack Corporation—(the lessee):Rather than using quantitative factors such as the 75percent and the 90 percent hurdles often referred to as thebright lines used in ASPE, the IFRS criteria use qualitativefactors to establish whether or not the risks and rewards ofownership are transferred to the lessee, and supportsclassification as a finance lease:
1.There is reasonable assurance that the lessee willobtain ownership of the leased property by the end ofthe lease term. If there is a bargain purchase option inthe lease, it is assumed that the lessee will exercise itand obtain ownership of the asset.
2.The lease term is long enough that the lessee willreceive substantially all of the economic benefits thatare expected to be derived from using the leasedproperty over its life.
3.The lease allows the lessor to recover substantially all ofits investment in the leased property and to earn areturn on the investment. Evidence of this is provided if
the present value of the minimum lease payments isclose to the fair value of the leased asset.
4.The leased assets are so specialized that, without majormodification and/or significant cost to the lessor, theyare of use only to the lessee.
None of the numerical thresholds need be applied, as wasthe case in ASPE, and so the treatment of the lease by thelessee would be the same, although it would be referred toas a finance lease, rather than a capital lease.
For ic!ori Leasing Corporation—(the lessor):Under IFRS, the lease would receive the same treatment asunder ASPE except the criteria need not specifically includethe !1o re%e"&e reco#"i!io"-bse* !es!s co"cer"i"#collec!bili!' "* es!im!i"# &"reimb&rsble cos!s; T/esere #e"erl reco#"i!io" !es!s !/! 1o&l* /%e !o be me!re#r*less; T/e lese 1o&l* be fi""ci"# lese si"ceic!ori is "o! m"&fc!&rer or *eler;
op!io" o" !/e lese of !/e exc%!io" eJ&ipme"! !/e riss "*re1r*s of o1"ers/ip /%e "o! bee" !r"sferre* ! !/e !ime of si#"i"# !/e lese "* so !/e lese is !re!e* s " oper!i"#lese; T/e mxim&m !erm of !/e lese is fo&r 'ers "* !/esse! is expec!e* !o /%e " eco"omic life of !e" 'ers;
Under IFRS, meeting any one or a combination of the followingcriteria normally indicates that the risks and rewards ofownership are transferred to the lessee, and supportsclassification as a finance lease:
• There is reasonable assurance that the lessee will obtainownership of the leased property by the end of the leaseterm. If there is a bargain purchase option in the lease, it isassumed that the lessee will exercise it and obtainownership of the asset.
• The lease term is long enough that the lessee will receivesubstantially all of the economic benefits that are expectedto be derived from using the leased property over its life.
• The lease allows the lessor to recover substantially all of
its investment in the leased property and to earn a returnon the investment. Evidence of this is provided if thepresent value of the minimum lease payments is close tothe fair value of the leased asset.
• The leased assets are so specialized that, without majormodification, they are of use only to the lessee.
Fir %l&e of <2@400;00 less *o1" p'me"! of <.000;00
Prese"! %l&e of ""&i!' *&e of . for >6 perio*s ! .9;
Excel form&l ?PMT(r!e"perp%f%!'pe)
+si"# fi""cil clc&l!or
P < (26400)
I .9
N >6
PMT < D iel*s <2;22
F < 4000
T'pe .
(b)T/e lese #reeme"! /s br#i" p&rc/se op!io"; T/e lese!/erefore J&lifies s cpi!l lese from !/e %ie1poi"! of !/elessee; T/e collec!bili!' of !/e lese p'me"!s is reso"bl'pre*ic!ble "* !/ere re "o impor!"! &"cer!i"!iess&rro&"*i"# !/e cos!s 'e! !o be i"c&rre* b' !/e lessor; $&e !o
!/e fc! !/! !/e i"i!il mo&"! of "e! i"%es!me"! (1/ic/ i" !/iscse eJ&ls !/e prese"! %l&e of !/e mi"im&m lese p'me"!s(<26400 !/e *o1" p'me"! of <.000) excee*s !/e lessorscos! (<2.200) !/e lese is sles-!'pe lese !o !/e lessor;
(b) Cs!le Lesi"# Corpor!io" s/o&l* clssif' !/e lese s fi""ce lese bec&se i! is "o! m"&fc!&rer or *eler;i Corpor!io" !/e lessee 1ill !re! !/e lese s fi""celese;
T/e IFRS criteria use qualitative factors to establish whetheror not the risks and rewards of ownership are transferred tothe lessee, and supports classification as a finance lease:1.There is reasonable assurance that the lessee willobtain ownership of the leased property by the end ofthe lease term. If there is a bargain purchase option inthe lease, it is assumed that the lessee will exercise it
and obtain ownership of the asset.2.The lease term is long enough that the lessee willreceive substantially all of the economic benefits thatare expected to be derived from using the leasedproperty over its life.
3.The lease allows the lessor to recover substantially all ofits investment in the leased property and to earn areturn on the investment. Evidence of this is provided ifthe present value of the minimum lease payments isclose to the fair value of the leased asset.
4.The leased assets are so specialized that, without majormodification, they are of use only to the lessee.
(c) For ASPE r ather than using qualitative factors describedunder part (b) above for IFRS, quantitative criteria such asany one of the following are used:
.; the term of the leaseexcee*i"# 849 of !/e remi"i"#eco"omic life of !/e sse!
2; !/e prese"! %l&e of !/e mi"im&m lese p'me"!s
excee*i"# @09 of !/e fir %l&e of !/e sse!, or=; the transfer of title to the asset, perhaps representedby the presence of a bargain purchase option will beapplied as the basis for the classification of the leaseas a capital lease for Wai Corporation.
For Cs!le Lesi"# the lessor, the lease would receive thesame treatment as under IFRS, as long as the twore%e"&ereco#"i!io"-bse* !es!s co"cer"i"# collec!bili!' "*es!im!i"# &"reimb&rsble cos!s re psse*;
Lese s/o&l* be !re!e* s cpi!l lese bec&se prese"!%l&e of mi"im&m lese p'me"!s eJ&ls !/e fir %l&e of !/ecomp&!er; T/e lese !erm is #re!er !/" 849 of !/e eco"omiclife of !/e sse! "* !i!le !r"sfers ! !/e e"* of !/e lese;
Lese s/o&l* be !re!e* s *irec! fi""ci"# lese bec&se!/e prese"! %l&e of !/e mi"im&m lese p'me"!s eJ&ls !/efir %l&e of !/e eJ&ipme"! "* (.) collec!bili!' of !/ep'me"!s is reso"bl' ss&re* (2) "o impor!"!&"cer!i"!ies s&rro&"* !/e cos!s 'e! !o be i"c&rre* b' !/e
lessor "* (=) !/e cos! !o !/e lessor eJ&ls !/e fir %l&e of !/e sse! ! !/e i"cep!io" of !/e lese;
(b) T/e primr' reso" for Hei" !o e"!er i"!o sle "*lesebc rr"#eme"! for i!s eJ&ipme"! is !o borro1cs/; T/is !r"sc!io" is similr !o !/e p&rc/se of "e1eJ&ipme"! &si"# cpi!l leses excep! !/! i" !/is cseHei" is &si"# " sse! i! is lre*' &si"# "* is fmilir 1i!/; Hei" 1is/es !o ob!i" some le%er#e b' borro1i"#
f&"*s for " mo&"! !/! excee*s !/e crr'i"# %l&e of !/esse! ! !/e !ime of !/e sle;
Si"ce !/e crr'i"# %l&e of !/e eJ&ipme"! o" !/e boos of Hei" ! !/e !ime of !/e sle represe"!s !/e *epreci!e* cos!of !/e sse! i" &se !/is %l&e is "o! i"!e"*e* !o correspo"*!o i!s fir %l&e; Hei" c" co"!i"&e 1i!/ i!s i"!e"!io" !o &se!/e sse! !o !/e comple!io" of i!s pl""e* &sef&l life; T/esle "* lesebc rr"#eme"! 1ill "o! *is!&rb !/is pl";Hei" is !i"# *%"!#e of !/e i"crese i" %l&e !o ob!i"
(a)Sale-leaseback arrangements are treated as though twotransactions were a single financing transaction if the lease
qualifies as a capital lease. Any gain or loss on the sale isconsidered unearned and is deferred and amortized over thelease term (if possession reverts to the lessor) or theeconomic life (if ownership transfers to the lessee). In thiscase, the lease qualifies as a capital lease because the leaseterm (10 years) is 83% of the remaining economic life of theleased property (12 years). Therefore, at 12/31/14, all of thegain of $120,000 ($520,000 – $400,000) would be deferredand amortized over 10 years. Since the sale took place on12/31/14, there is no depreciation for 2014.
(b)A sale-leaseback is usually treated as a single financingtransaction in which any profit on the sale is consideredunearned and is deferred and amortized by the seller.However, the lease does not meet any of the criteria of acapital lease for the property sold. In this case, the sale andthe leaseback are accounted for as separate transactions.Therefore, the full gain ($480,000 – $420,000, or $60,000) isrecognized.
(c)The profit on the sale of $121,000 should be deferred andamortized over the lease term. The lease qualifies as acapital lease. Since the leased asset is being depreciatedusing the straight-line depreciation method, the deferredgain should also be reported in the same manner. Therefore,in the first year, $12,100 ($121,000 ÷ 10) of the gain would berecognized.
(d)In this case, Barnes Corp. would report a loss of $87,300($300,000 – $212,700) for the difference between the bookvalue and lower fair value. TheCICA Handbook requires thatwhen the fair value of the asset is less than the book value(carrying amount), a loss must be recognized immediately.In addition, rent expense of $72,000 ($6,000 per month X 12months) should be reported.
(b) T/e re"!l of l"* c" o"l' be cco&"!e* for s cpi!llese b' !/e lessee if !/e re"!l of !/e proper!' co"!i"s
br#i" p&rc/se op!io" or if !/e lese !r"sfers o1"ers/ipof !/e proper!' !o !/e lessee; Si"ce !/is is "o! !/e cse /ere!/e lese of !/e l"* /* !o be !re!e* s " oper!i"#lese; I" !/e cse of eJ&ipme"! !/e possibili!' of cco&"!i"# for !/e lese s cpi!l lese is more liel' !o*epe"* o" !/e !erms of !/e lese i" rel!io" !o !/ecpi!li!io" cri!eri;
3ur5ose>to 5ro9ide an o55ortunity for the student to contrast t0o alternati9emeans (y 0hich a (usiness can acFuire soft0are for its (usiness (y usingleasing Along 0ith 5re5aring all the necessary calculations, and ;ournal entries,the student must also contrast the financial statement effect of the t0o differentleasing alternati9es inally the Fualitati9e considerations and the short and long4term im5lications of each o5tion must (e outlined (y the student
3ro(lem ".4" Time $)4). minutesG
3ur5ose>to 5ro9ide an o55ortunity for the student to contrast t0o alternati9emeans (y 0hich a (usiness can acFuire eFui5ment and soft0are for its (usiness(y using leasing Along 0ith 5re5aring all the necessary calculations, the student
must also contrast the financial statement effect of the t0o different leasingalternati9es for the first year and for the o9erall term of lease 5lus a rene0al5eriod under one o5tion inally the Fualitati9e considerations and the short andlong4term im5lications of each o5tion must (e outlined (y the student,em5hasi<ing the effects on cash flo0
3ro(lem ".4# Time $)4). minutesG
3ur5ose>to 5ro9ide the student 0ith a lease situation in9ol9ing monthly5ayments made for a truck The lease has a residual 9alue guaranteed (y thelessee Along 0ith 5re5aring all the necessary calculations, and ;ournal entries,
the student must also 5re5are the statement of financial 5osition, the income andcash flo0 statements on a com5arati9e (asis as 0ell as any reFuired notedisclosures The must also 5re5are the ;ournal entry at the com5letion of theterm of the lease in9ol9ing the dis5osal of the truck and the lessees in9ol9ementconcerning the guaranteed residual 9alue
3ro(lem ".4$ Time $.4$) minutesG
3ur5ose>to 5ro9ide the student 0ith a lease situation descri(ed in 3ro(lem ".4"(ut from the 5ers5ecti9e of the lessor The reFuirement for com5arati9e financialstatement disclosure is included in the 5ro(lem
3ro(lem ".4) Time $.4$) minutesG
3ur5ose>to 5ro9ide an o55ortunity for the student to contrast the entries andcorres5onding financial statements of the lessor and lessee 0hen the conditionscall for the accounting of the lease as a ca5ital lease to the lessee (ut as ano5erating lease to the lessor The odd result is that the asset is re5orted on (othstatements of financial 5osition
3ur5ose>to de9elo5 an understanding of the accounting treatment for o5eratingleases The student is reFuired to identify the ty5e of lease in9ol9ed, e65lain theres5ecti9e reasons for their classification, and discuss the accounting treatmentthat should (e a55lied for (oth the lessee and lessor The student is also askedto record e6ecutory costs 5aid (y the lessor and 5re5are the ;ournal entries toreflect the first year of this lease contract for (oth the lessee and lessor and todiscuss the disclosures reFuired of the lessee and lessor Included in this5ro(lem is a reFuirement to com5are the factors and criteria for classificationdifferences (et0een I!2 and A23E
3ro(lem ".4+
Time #.4#) minutesG
3ur5ose>to 5ro9ide the student 0ith a lease situation containing a (argain5urchase o5tion and (oth an im5licit rate and a stated interest rate (et0een0hich the student must choose The student must first discuss the conditions of the case that su55ort the argument to ca5itali<e the lease and list s5ecifice9idence to demonstrate that the transfer of risks and re0ards of o0nershi5 hastaken 5lace The student must then calculate the a55ro5riate amount at 0hich toca5itali<e the lease and, in a last reFuirement, gi9en different interest rates,5re5are the statement of financial 5osition and income statement 5resentation of this lease (y the lessee
3ro(lem ".4 Time #.4$. minutesG
3ur5ose>to 5ro9ide an understanding of ho0 lease information is re5orted onthe statement of financial 5osition and income statement for t0o different years inregard to the lessee In addition, the year4end month is changed in order to hel55ro9ide an understanding of the com5lications in9ol9ed 0ith 5artial 5eriodsIncluded in this 5ro(lem is a reFuirement to com5are the factors and criteria for classification differences (et0een I!2 and A23E
3ro(lem ".4- Time #.4$. minutesG
3ur5ose>to 5ro9ide an understanding of ho0 lease information is re5orted on
the statement of financial 5osition and income statement for t0o different years inregard to the lessor In addition, the year4end month is changed in order to hel55ro9ide an understanding of the com5lications in9ol9ed 0ith 5artial 5eriodsIncluded in this 5ro(lem is a reFuirement to com5are the factors and criteria for classification differences (et0een I!2 and A23E
3ur5ose>to de9elo5 an understanding of the accounting for ca5ital leases0here the lease 5ayments for the first half of the lease term differ from those for the latter half The student is reFuired to calculate for the lessee the discounted5resent 9alue of the leased 5ro5erty and the related o(ligation at the leasesince5tion date The student is also asked to 5re5are ;ournal entries for thelessee
3ro(lem ".411
Time #)4$) minutesG
3ur5ose>to de9elo5 an understanding of the accounting 5rocedures in9ol9ed ina sales4ty5e leasing arrangement The student is reFuired to discuss the natureof this lease transaction from the 9ie05oint of (oth the lessee and lessor Thestudent is also reFuested to 5re5are the ;ournal entries to record the lease for (oth the lessee and lessor 5lus illustrate the items and amounts that 0ould (ere5orted on the statement of financial 5osition and statement of cash flo0s at theend of the first year for the lessee and the lessor
3ro(lem ".41"
Time ")4#) minutesG
3ur5ose>to de9elo5 an understanding of the accounting for a ca5ital lease (ythe lessee in an annuity due arrangement The student is reFuired to 5re5are thelease amorti<ation schedule for the entire term of the lease and all the necessary
;ournal entries for the lease through the first t0o lease 5ayments The student is
also asked to indicate the amounts that 0ould (e re5orted on the lesseesstatement of financial 5osition and statement of cash flo0s inally the studentmust contrast the financial statement re5orting 0ith that o(tained for a ne0 set of conditions leading to the treatment of the lease as an o5erating lease
3ro(lem ".41# Time #)4$) minutesG
3ur5ose>to de9elo5 an understanding of the accounting treatment accorded asales4ty5e lease in9ol9ing an unguaranteed and guaranteed residual 9alue Thestudent is reFuired to discuss the nature of the lease 0ith regard to the lessor and to calculate the amount of the gross in9estment, the unearned interestincome, the sale 5rice, and the cost of goods sols The student is also reFuired to
construct a 1.4year lease amorti<ation schedule for the leasing arrangement, andto 5re5are the lessors ;ournal entries for the first year of the lease contractinally disclosure of the net in9estment must (e 5re5ared
3ur5ose>to de9elo5 an understanding of a ca5ital lease 0ith an unguaranteed
and guaranteed residual 9alue, 0ith and 0ithout a (argain 5urchase o5tion Thestudent e65lains 0hy it is a ca5ital lease and calculates the amount of the initialo(ligation The student 5re5ares a 1.4year amorti<ation schedule and all of thelessees ;ournal entries for the first year under each of the different assum5tionsIncluded in this 5ro(lem is a reFuirement to com5are the factors and criteria for classification differences (et0een I!2 and A23E
3ro(lem ".41) Time $.4$) minutesG
3ur5ose>to de9elo5 an understanding of a sales4ty5e lease 0ith a guaranteedand unguaranteed residual 9alue The student discusses the classification of the
lease and calculates the gross in9estment, unearned interest income, sales5rice, and cost of sales The student 5re5ares a 1.4year amorti<ation scheduleand all of the lessors ;ournal entries for the first year The 5ro(lem then goes onto reFuire the student to calculate the amount of de5reciation to (e recorded (ythe lessee under conditions 0here the residual 9alue is and is not guaranteed (ythe lessee The financial statement disclosure reFuirements to the lessor mustalso (e outlined (ased on these t0o conditions Included in this 5ro(lem is areFuirement to com5are the factors and criteria for classification differences(et0een I!2 and A23E
3ro(lem ".41 Time #.4$. minutesG
3ur5ose>to de9elo5 an understanding of ho0 residual 9alues and direct costs in5rocessing the lease affect the accounting for the lessee and the lessor Thestudent must understand (oth the accounting for a guaranteed andunguaranteed residual 9alue and determine ho0 large the residual 9alue must (eto ha9e o5erating lease treatment Included in this 5ro(lem is a reFuirement tocom5are the factors and criteria for classification differences (et0een I!2 and
A23E
3ro(lem ".41+ Time #.4#) minutesG
3ur5ose>to 5ro9ide the student 0ith the o55ortunity to contrast the financialim5lications of t0o alternati9e leases offered to a (usiness 0ith liFuidity5ro(lems The student must 5erform the necessary analysis to conclude as toho0 the leases 0ould (e accounted for and 5ro9ide a (asis for therecommendation in a formal re5ort The student 0ill need to eliminate someunnecessary minor factors such as small differences in lease term datesG inorder to Fuickly <ero in on the essential issues surrounding the choices offered
3ur5ose>to 5ro9ide the student 0ith the o55ortunity to contrast the financialim5lications and re5orting 0hen a lease is treated as an o5erating lease (y thelessee and a ca5ital lease (y the lessor, on account of the in9ol9ement of a third5arty 0hen a guaranteed residual 9alue e6ists The student must 5re5are theentries and the financial statement disclosure of (oth 5arties in the leaseagreement This 5ro(lem highlights the unsol9ed issue of the eFui5ment not(eing re5orted on either statement of financial 5osition
3ro(lem ".41- Time #.4#) minutesG
3ur5ose>to 5ro9ide the student 0ith the o55ortunity to 5re5are the accounting
for lease using the contract4(ased a55roach Included in the instructions is are9ision of estimate concerning the guaranteed residual 9alue of the leasedasset Journal entries, ad;usting ;ournal entries and a re9ised amorti<ationschedule must also (e 5re5ared (y the student
3ro(lem ".4". Time ).4. minutesG
3ur5ose>to 5ro9ide the student 0ith the o55ortunity to contrast three differento5tions to o(tain a lu6ury 9ehicle, including& finance a 5urchase, lease and rene0a lease and lease and e6ercise the o5tion to 5urchase A fourth o5tion must (e5re5ared suing the contract4(ased a55roach 2e9eral calculations, amorti<ation
ta(les and ;ournal entries are also reFuired in this 5ro(lem inally, a summaryfor the first years statement of financial 5osition and income statement for allo5tions as 0ell as a summary of all e65enses for the ) years use of the 9ehiclemust (e summari<ed Additional considerations in making choices must also (e5ro9ided (y the student
3ro(lem ".4"1 Time ".4") minutesG
3ur5ose>to 5ro9ide the student 0ith the lessors accounting of one of theo5tions discussed in 3".4".
3ro(lem ".4"" Time $.4$) minutesG3ur5ose>to de9elo5 an understanding of ho0 to handle a sale and lease(acktransaction, including the 5re5aration of the lessees ;ournal entries A second setof assum5tions is used to arri9e at a different conclusion, 0hich is to account for the lease as an o5erating lease
3ur5ose>to 5ro9ide an o55ortunity for the student to account for a sale andlease(ack transaction 0here land and (uildings are in9ol9ed The student musta55ly the ca5itali<ation criteria to the (uilding (ut lea9e the land as an o5eratinglease The lease 5ayments must therefore (e disaggregated This 5ro(lem alsoin9ol9es the financial statement disclosure reFuired at the end of the first year of the lease
!erm (4 'ers) is less !/" 849 of !/e eco"omic life (6 'ers) of !/e lese* sse!; T/e lese !erm is 2;49 (4 5 6) of !/e sse!seco"omic life; T/ere is "o br#i" p&rc/se op!io" "* !/eprese"! %l&e of mi"im&m lese p'me"!s of <2426 represe"!6>9 of !/e fir %l&e ! "&r' . 20.> of <=0000 flli"# s/or!of !/e cri!eri of @09 !o !re! !/e lese s cpi!l lese &"*er ASPE;
T/e mi"im&m lese p'me"!s i" !/e cse i"cl&*e !/e br#i"p&rc/se op!io" of <200; T/e prese"! %l&e !/erefore is
P of mo"!/l' p'me"! ;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;; <28.0>P of br#i" p&rc/se op!io" of <200 ;;;;;;;;;;;;;;;;; .2>
Prese"! %l&e of mi"im&m lese p'me"!s;;;;;;;;;;;;;; <28226
Prese"! %l&e of " ""&i!' *&e of . for 4 perio*s ! .09;<400 , >;.@6 ? <28.0>
Prese"! %l&e of si"#le p'me"! of . for 4 perio*s ! .09
<200 , ;20@2 ? <.2>
Excel form&l ?P(r!e"perpm!f%!'pe)
+si"# fi""cil clc&l!or
P < D iel*s <28226
I .09
N 4
PMT < (400)
F < (200)T'pe .
To I"!erior $esi#" I"c; !/is lese is cpi!l lese bec&se !/e!erms s!isf' !/e follo1i"# cri!eri
.; Al!/o&#/ s i" Op!io" No; . !/e lese !erm is "o! #re!er !/" 849 of !/e eco"omic life of !/e lese* sse! !/! is !/elese !erm is 2;49 (4K6) of !/e eco"omic life !/ere is
br#i" p&rc/se op!io";
2; T/e prese"! %l&e of !/e mi"im&m lese p'me"!s is #re!er !/" @09 of !/e fir %l&e of !/e lese* sse! !/! is !/eprese"! %l&e of <28226 is @.9 of !/e fir %l&e of !/elese* sse! of <=0000 (<28226 K <=0000 ? @0;89)
(f)Among Interior’s paramount concerns will be ensuring thatit continues to meet its debt to equity covenant. Since allfinancing is done with the bank, Interior Design Inc. may beperceived to be of high risk by the bank. Entering into thePrecision Inc. lease (Option No. 1) would provide off balancesheet financing, keeping the obligations under capital leasesoff the balance sheet. Equity would be reduced by the leasepayments expensed each period.
In contrast the Graphic Design Inc. (Option No. 2) leasewould increase Interior’s liabilities by the present value ofthe minimum lease payments. Interest expense each period
and depreciation of the leased asset will decrease netincome and therefore equity each period.
To maintain their debt to equity covenant, Interior wouldprobably choose to enter into the Precision lease (operatinglease Option No. 1) to minimize debt on their statement offinancial position.
(g)In the long term, Option No. 2 presents the better option.The software will be owned and used by Interior over theeight-year useful life of the asset, instead of the five-yearterm of lease under the operating lease, Option No. 1. Theother immediate disadvantage to the operating lease optionNo. 1 is the large immediate (January 1, 2014) cash outflowrequired by the prepayment clause under the operatinglease of $12,000. This payment could create an importantliquidity problem over the term of the lease, especially in thefirst year.
The conclusion to be drawn from this study is that choicesare often made by businesses for reasons outside whatmakes economic sense overall. The FASB and IASBmovement towards removing the distinction betweenoperating and capital leases will eliminate this problem aschoices between leases will not be made based on theobjective to reduce or eliminate the presence of liabilities onthe statement of financial position.
No!e !o i"s!r&c!or
T/e !1o l!er"!i%es re "o! s!ric!l' spei"# comprble i" cpi!l b&*#e!i"# se"se s !/e *iffere"ce i" !/e p&rc/se op!io"le%es op!io" . 1i!/ 4 'er life "* op!io" 2 1i!/ " 6 'er life;T/e prese"! %l&e of !/e p&rc/se op!io" i" Op!io" . (l!/o&#/ "o"-GAAP !re!me"!) is "ee*e* !o me !/e !1o op!io"scomprble (P is <=.00); Op!io" 2 is !/erefore s&perior i" prese"! %l&e se"se; I! is impor!"! !o me"!io" !/! compri"#!/e cco&"!i"# !re!me"! 1i!/o&! co"si*eri"# !/e impc! o"cs/ flo1s is i"*eJ&!e 1/e" e%l&!i"# m"#eme"!s*ecisio"s;
(=) T/e lese !erm is #re!er !/" 849 of !/e eco"omic life of !/e lese* sse! !/! is !/e lese !erm is 6=9 (4K) of !/eeco"omic life;T/e prese"! %l&e of !/e mi"im&m lese p'me"!s eJ&l !/efir %l&e of !/e eJ&ipme"!see clc&l!io"
J&li!!i%e fc!ors !o es!blis/ 1/e!/er or "o! !/e riss "*re1r*s of o1"ers/ip re !r"sferre* !o !/e lessee "*s&ppor!s clssific!io" s fi""ce lese.; T/ere is reso"ble ss&r"ce !/! !/e lessee 1ill
ob!i" o1"ers/ip of !/e lese* proper!' b' !/e e"* of !/e lese !erm; If !/ere is br#i" p&rc/se op!io" i"!/e lese i! is ss&me* !/! !/e lessee 1ill exercise i!"* ob!i" o1"ers/ip of !/e sse!;
2; T/e lese !erm is lo"# e"o&#/ !/! !/e lessee 1illrecei%e s&bs!"!ill' ll of !/e eco"omic be"efi!s !/!re expec!e* !o be *eri%e* from &si"# !/e lese*proper!' o%er i!s life;
=; T/e lese llo1s !/e lessor !o reco%er s&bs!"!ill' llof i!s i"%es!me"! i" !/e lese* proper!' "* !o er" re!&r" o" !/e i"%es!me"!; E%i*e"ce of !/is is pro%i*e* if !/e prese"! %l&e of !/e mi"im&m lese p'me"!s isclose !o !/e fir %l&e of !/e lese* sse!;
>; T/e lese* sse!s re so specilie* !/! 1i!/o&! mor mo*ific!io" "*Kor si#"ific"! cos! !o !/e lessor !/e'
re of &se o"l' !o !/e lessee;
O!/er i"*ic!ors i"cl&*e si!&!io"s 1/ere !/e lesseebsorbs !/e lessors losses if !/e lessee c"cels !/e leseor !/e lessee ss&mes !/e ris ssoci!e* 1i!/ !/e mo&"!of !/e resi*&l %l&e of !/e sse! ! !/e e"* of !/e lese or 1/ere !/ere is br#i" re"e1l op!io"1/e" !/e lesseec" re"e1 !/e lese for " **i!io"l !erm ! si#"ific"!l'less !/" !/e mre! re"!;
T/e s!"*r* lso s!!es !/! !/ese i"*ic!ors re "o!l1's co"cl&si%e; T/e *ecisio" /s !o be m*e o" !/es&bs!"ce of ec/ specific !r"sc!io"; If !/e lessee*e!ermi"es !/! !/e riss "* be"efi!s of o1"ers/ip /%e"o! bee" !r"sferre* !o i! !/e lese is clssifie* s "oper!i"# lese;
For Situ Ltd. the lessor, under IFRS, the lease would receivethe same treatment as under ASPE except the criteria neednot include the !1o re%e"&e reco#"i!io"-bse* !es!sco"cer"i"# collec!bili!' "* es!im!i"# &"reimb&rsblecos!s; Si!& is "o! m"&fc!&rer or *eler "* so !/is isfi""ce lese;
(b) Calculation of annual rental payment:(Hi"! 1/e" &si"# fi""cil clc&l!or e"s&re !/! !/ecompo&"*i"# is *o"e mo"!/l' PK ? .)
Excel form&l ?PMT(r!e"perp%f%!'pe)
+si"# fi""cil clc&l!or
P < 20@.
I .9
N =
PMT < D iel*s (<00)
F < (=400)
T'pe .
T/is co"firms !/! !/e i"!eres! r!e &se* !o clc&l!e !/e lesep'me"! 1s .29 or .9 per mo"!/; Al!er"!i%el' !/e RATEf&"c!io" co&l* /%e bee" &se* *irec!l'; (T/e lese p'me"!si"cl&*e !/e exec&!or' cos!s of <20 per mo"!/ "* re !/ereforei" !/e mo&"! of <20;)
() T/is is cpi!l lese !o Lbo"![ si"ce !/e lese !erm is
#re!er !/" 849 of !/e eco"omic life of !/e lese* sse!;T/e lese !erm is 869 (8 5 @) of !/e sse!s eco"omic life;
For LePage, the collectibility of the lease payments is notreasonably predictable, and there are importantuncertainties surrounding the costs yet to be incurred.Accordingly, the earnings process is not consideredcomplete and, in spite of the fact that the fair value($560,000) of the equipment exceeds the lessor’s cost
($420,000), the lease cannot be recorded as a sales-typelease by LePage and must be recorded as an operatinglease.
(b) Calculation of annual rental payment:
To clc&l!e !/e mo&"! of !/e p'me"!s &si"# Tbles
**4.78448
.37594*)X($80,000 –$560,000 ? <..084@
Prese"! %l&e of <. ! .49 for 8 perio*s;Prese"! %l&e of " ""&i!' *&e ! .49 for 8 perio*s;
Under IFRS, meeting any one or a combination of the followingcriteria normally indicates that the risks and rewards ofownership are transferred to the lessee, and supportsclassification as a finance lease:1.There is reasonable assurance that the lessee will obtainownership of the leased property by the end of the leaseterm. If there is a bargain purchase option in the lease, it isassumed that the lessee will exercise it and obtainownership of the asset.
2.The lease term is long enough that the lessee will receive
substantially all of the economic benefits that areexpected to be derived from using the leased propertyover its life.
3.The lease allows the lessor to recover substantially all ofits investment in the leased property and to earn a returnon the investment. Evidence of this is provided if thepresent value of the minimum lease payments is close tothe fair value of the leased asset.
4.The leased assets are so specialized that, without major
modification and/or significant cost to the lessor they areof use only to the lessee.No"e of !/ese co"*i!io"s /%e bee" me! "* so !/e lese is "oper!i"# lese !o bo!/ S'"er#e!ics "* G&mo1si;
<2.400 A""&l Lese P'me"!s , P of ""&i!' *&e ! 89for 'ers <2.400 , 4;.0020 ? <.0@4> 1/ic/ is less!/" <.>>000;00 (@09 , <.0000;00)
A! les! o"e of !/e !/ree cri!eri 1o&l* /%e /* !o bes!isfie* for !/e lese !o be clssifie* s o!/er !/" "oper!i"# lese; T/e proper!' is recor*e* s re"!lproper!' !o !/e lessor "* 1ill be !re!e* s p'me"! of re"! b' !/e lessee &"*er !/e oper!i"# lese;
(a) Be"efi!s of o1"ers/ip re !/e bili!' !o &se !/e sse! !o#e"er!e profi!s o%er i!s &sef&l life !o be"efi! from "'ppreci!io" i" !/e sse!s %l&e "* !o relie i!s resi*&l%l&e ! !/e e"* of i!s eco"omic life; T/e riss o" !/e o!/er /"* re !/e expos&re !o &"cer!i" cos!s "* re!&r"s "*!o ris of loss from &se or i*le cpci!' "* from!ec/"olo#icl obsolesce"ce;
T/e IFRS cri!eri &se J&li!!i%e fc!ors !o es!blis/1/e!/er or "o! !/e riss "* re1r*s of o1"ers/ip re
!r"sferre* !o !/e lessee "* s&ppor!s clssific!io" s fi""ce lese.; T/ere is reso"ble ss&r"ce !/! !/e lessee 1ill
ob!i" o1"ers/ip of !/e lese* proper!' b' !/e e"* of !/e lese !erm; If !/ere is br#i" p&rc/se op!io" i"!/e lese i! is ss&me* !/! !/e lessee 1ill exercise i!"* ob!i" o1"ers/ip of !/e sse!;
2; T/e lese !erm is lo"# e"o&#/ !/! !/e lessee 1illrecei%e s&bs!"!ill' ll of !/e eco"omic be"efi!s !/!
re expec!e* !o be *eri%e* from &si"# !/e lese*proper!' o%er i!s life;=; T/e lese llo1s !/e lessor !o reco%er s&bs!"!ill' ll
of i!s i"%es!me"! i" !/e lese* proper!' "* !o er" re!&r" o" !/e i"%es!me"!; E%i*e"ce of !/is is pro%i*e* if !/e prese"! %l&e of !/e mi"im&m lese p'me"!s isclose !o !/e fir %l&e of !/e lese* sse!;
>; T/e lese* sse!s re so specilie* !/! 1i!/o&! mor mo*ific!io" ! si#"ific"! cos! !o !/e lessor !/e' re of &se o"l' !o !/e lessee;
No "&mericl !/res/ol*s re pplie* s is !/e cse 1i!/ASPE "* so !/e !re!me"! of !/e lese b' !/e lessee1o&l* be !/e sme l!/o&#/ i! 1o&l* be referre* !o s fi""ce lese r!/er !/" cpi!l lese;
(c) For Mc\ee Elec!ro"ics L!*;(!/e lessee)R!/er !/" &si"# J&"!i!!i%e fc!ors s&c/ s !/e 84perce"! "* !/e @0 perce"! /&r*les of!e" referre* !o s !/e
bri#/! li"es &se* i" ASPE IFRS cri!eri &se J&li!!i%efc!ors !o es!blis/ 1/e!/er or "o! !/e riss "* re1r*s of o1"ers/ip re !r"sferre* !o !/e lessee "* s&ppor!sclssific!io" s fi""ce lese.; T/ere is reso"ble ss&r"ce !/! !/e lessee 1ill
ob!i" o1"ers/ip of !/e lese* proper!' b' !/e e"* of !/e lese !erm; If !/ere is br#i" p&rc/se op!io" i"!/e lese i! is ss&me* !/! !/e lessee 1ill exercise i!"* ob!i" o1"ers/ip of !/e sse!;
2; T/e lese !erm is lo"# e"o&#/ !/! !/e lessee 1illrecei%e s&bs!"!ill' ll of !/e eco"omic be"efi!s !/!re expec!e* !o be *eri%e* from &si"# !/e lese*proper!' o%er i!s life;
(c) +si"# IFRS oo*/o&se co"si*ers !/e sme fc!ors sMc\ee !/e lessee i" *e!ermi"i"# 1/e!/er !/e riss "*be"efi!s of o1"ers/ip of !/e lese* proper!' re !r"sferre*;T/ese fc!ors i"cl&*e
.; T/ere is reso"ble ss&r"ce !/! !/e lessee 1ill
ob!i" o1"ers/ip of !/e lese* proper!' b' !/e e"* of !/e lese !erm; If !/ere is br#i" p&rc/se op!io" i"!/e lese i! is ss&me* !/! !/e lessee 1ill exercise i!"* ob!i" o1"ers/ip of !/e sse!;
() T/e lese s/o&l* be !re!e* s cpi!l lese b' LeeI"*&s!ries reJ&iri"# !/e lessee !o cpi!lie !/e lese*
sse!; T/e lese J&lifies for cpi!l lese cco&"!i"# b' !/elessee bec&se (.) !i!le !o !/e e"#i"es !r"sfers !o !/elessee "* (2) !/e lese !erm is eJ&l !o !/e es!im!e* lifeof !/e sse!; /ile "o me"!io" is m*e of !/e mo&"! of !/efir %l&e of !/e lese* sse! ! "&r' . 20.> i! isreso"ble !o ss&me !/! i! 1o&l* be bo%e !/e cos! !om"&fc!&re !/e e"#i"es; Lor I"c; is i" b&si"ess !om"&fc!&re "* sell i!s pro*&c!s so Lor 1o&l* 1"! !oreco%er !/e sles price of !/e e"#i"es "o! &s! !/eir cos!;
T/e prese"! %l&e of !/e mi"im&m lese p'me"!s (seebelo1) is <>400000 "* !/e ss&mp!io" is !/! !/is is !/eselli"# price "* fir %l&e of !/e e"#i"es; T/e !r"sc!io"represe"!s p&rc/se fi""ce* b' i"s!lme"! p'me"!so%er .0-'er perio*;
For Lor I"c; !/e !r"sc!io" is sles-!'pe lese bec&se m"&fc!&rers profi! ccr&es !o Lor I"c; T/is leserr"#eme"! lso represe"!s !/e m"&fc!&rers fi""ci"#of !/e !r"sc!io" o%er perio* of .0 'ers;
Lese P'me"! Recei%bleP'me"! per perio* < 20@4Perio*s , .0
Lese recei%ble <20@40
Prese"! l&e of Lese P'me"!s<20@4 , 8;2>6@ <>400000
() T/e lese is sles-!'pe lese bec&se (.) !/e lese !ermexcee*s 849 of !/e sse!s es!im!e* eco"omic life (2)
collec!bili!' of p'me"!s is reso"bl' ss&re* "* !/erere "o f&r!/er cos!s !o be i"c&rre* "* (=) CHL Corpor!io"relie* " eleme"! of profi! si*e from !/e fi""ci"#c/r#e;
.; Gross i"%es!me"! is <24000 (.0 ""&l lesep'me"!s of <24000 ec/ pl&s !/e &"#&r"!ee*resi*&l %l&e of <.4000);
2; +"er"e* i"!eres! i"come <8660 is !/e #rossi"%es!me"! of <24000 less <.66.20 !/e i"i!il prese"!%l&e of !/e i"%es!me"! clc&l!e* s follo1s
A""&l lese p'me"! < 24000Prese"! %l&e of " ""&i!' *&e of <. for
.0 perio*s *isco&"!e* ! 69
8;2>6@
Prese"! %l&e of !/e .0 re"!l p'me"!s .6..82A** prese"! %l&e of es!im!e* resi*&l
(a) For !/e lessee &"*er ASPE r!/er !/" &si"# J&"!i!!i%efc!ors *escribe* &"*er pr! (b) belo1 for IFRS J&"!i!!i%e
cri!eri s&c/ s.; !/e !erm of !/e lese excee*i"# 849 of !/e remi"i"#
eco"omic life of !/e sse!2; t/e prese"! %l&e of !/e mi"im&m lese p'me"!s
excee*i"# @09 of !/e fir %l&e of !/e sse! or=; !/e prese"ce of br#i" p&rc/se op!io" 1ill be
pplie* s !/e bsis for !/e clssific!io" of !/e lese;
(b) I! 1ill be clssifie* s cpi!l lese for Pro%i"cil Airli"es
Corp; bec&se (.) !/e lese !erm is 849 or more of !/e sse!s eco"omiclife "* (2) !/e prese"! %l&e of !/e mi"im&m lesep'me"!s excee*s @09 of !/e fir %l&e of !/e lese* sse!;
(c) T/e IFRS cri!eri &se J&li!!i%e fc!ors !o es!blis/1/e!/er or "o! !/e riss "* re1r*s of o1"ers/ip re!r"sferre* !o !/e lessee "* s&ppor!s clssific!io" s fi""ce lese.; T/ere is reso"ble ss&r"ce !/! !/e lessee 1ill
ob!i" o1"ers/ip of !/e lese* proper!' b' !/e e"* of !/e lese !erm; If !/ere is br#i" p&rc/se op!io" i"!/e lese i! is ss&me* !/! !/e lessee 1ill exercise i!"* ob!i" o1"ers/ip of !/e sse!;
2; T/e lese !erm is lo"# e"o&#/ !/! !/e lessee 1illrecei%e s&bs!"!ill' ll of !/e eco"omic be"efi!s !/!re expec!e* !o be *eri%e* from &si"# !/e lese*proper!' o%er i!s life;
(*) A! $ecember =. !/e e"* of !/e firs! 'er of !/e lesee""i"#s I"c; 1ill repor! o" !/e i"come s!!eme"! !/e slesre%e"&e mo&"! of <=>=8=> "* cos! of #oo*s sol* of <2.0000 i"*ic!i"# #ross profi! from !/e sle of !/e ,-r'eJ&ipme"! i" !/e mo&"! of <.==8=>; T/e' 1ill lso repor!!/e i"!eres! i"come o" !/e lese of <2@=8= "* selli"#expe"ses of <.>000;
T/e s!!eme"! of fi""cil posi!io" 1o&l* repor! !/ec&rre"! por!io" of !/e lese recei%ble of <40000 "* !/e
"o"-c&rre"! por!io" of <>.4000 re*&ce* b' !/e c&rre"!por!io" of !/e &"er"e* i"!eres! i"come o" !/e lese i" !/emo&"! of <28=.. "* !/e "o"-c&rre"! por!io" for <..>462;
For !/e s!!eme"! of cs/ flo1s &si"# !/e i"*irec! form!for !/e cs/ flo1 from oper!io"s !/ere 1ill be "*&s!me"! of " **i!io" !o i"come for !/e re*&c!io" of i"%e"!or' of <2.0000 "* " **i!io" for !/e "e! i"cresei" &"er"e* i"come of <.>.6@= (<.8.2 <2@=8=); For
For !/e "o!e *isclos&re !/e list of required and desirabledisclosures include: the total future minimum leasepayments receivable, unguaranteed residual values,unearned finance income, executory costs included inminimum lease payments, contingent rentals taken into
income, lease terms, and the amounts of minimum leasepayments receivable for each of the next five years.
(e) Si"ce !/e implici! r!e i" !/e lese of .09 is "o1" !o !/elessee SNC Me*icl Ce"!re !/e i"!eres! r!e &se* b' SNC
1ill be !/e sme s !/! of !/e lessor e""i"#s I"c;Co"seJ&e"!l' !/e mc/i"er' 1ill be cpi!lie* ! !/emo&"! of <=>=8=> !/e prese"! %l&e of !/e mi"im&mlese p'me"!s s clc&l!e* i" () bo%e; T/e*epreci!io" of !/e mc/i"er' 1ill be bse* o" !/e !erm of !/e lese s SNC /s #&r"!ee* !/e resi*&l %l&e; T/e*epreci!io" expe"se 1ill !/erefore be <=268= ((<=>=8=> -<.4000) K .0 'ers);
(f) H* !/e resi*&l %l&e of !/e ,-r' mc/i"e "o! bee"#&r"!ee* !/e mo&"! of !/e sle "* !/e cos! of #oo*ssol* recor*e* 1o&l* /%e bee" re*&ce* b' !/e prese"!%l&e of !/e resi*&l %l&e i" !/e mo&"! of <486= (<.4000, ;=644> for P of <. for .0 'ers ! .09);
co"si*ers !/e sme fc!ors s L"ier $ir' L!*; !/e lesseei" *e!ermi"i"# 1/e!/er !/e riss "* be"efi!s of o1"ers/ipof !/e lese* proper!' re !r"sferre*; T/ese fc!orsi"cl&*e• T/ere is reso"ble ss&r"ce !/! !/e lessee 1ill
ob!i" o1"ers/ip of !/e lese* proper!' b' !/e e"* of !/e lese !erm; If !/ere is br#i" p&rc/se op!io" i"!/e lese i! is ss&me* !/! !/e lessee 1ill exercise i!"* ob!i" o1"ers/ip of !/e sse!;
(e) I" !/e cse of (.) !/e mo&"! of !/e "e! i"%es!me"! ! !/ei"cep!io" of !/e lese 1o&l* be <2..@02 <.200 or
<2.=.02; For (2) "* (=) bo!/ 1o&l* be <2..@02 s !/ees!im!e* resi*&l %l&e exis!s 1/e!/er or "o! i! is#&r"!ee*;
(f) T/e prese"! %l&e of !/e resi*&l 1o&l* /%e !o be ! les!.09 of !/e fir %l&e of !/e lese* sse! or .09 , <2..@02 ?<2..@0;20; T/e f&!&re %l&e of !/is l&mp s&m ("?6 i?) ?<2..@0;20 , .;4@=64 or <2..@0.@0;20K;28>. bo!/ of 1/ic/ ? <==88>;
+si"# fi""cil clc&l!orP < 2..@0
I 9
N 6
PMT < 0
F < D iel*s <==88=>
T'pe .
Excel form&l ?F(r!e"perpm!p%!'pe)
(g) Had Green been using ASPE:
T/e lese #reeme"! s!isfies bo!/ !/e 849 "* @09J&"!i!!i%e reJ&ireme"!s collec!bili!' is reso"bl'pre*ic!ble "* !/ere re "o impor!"! &"cer!i"!iess&rro&"*i"# !/e cos!s 'e! !o be i"c&rre* b' !/e lessor; For L"ier $ir' L!*; !/e lessee i! is cpi!l lese "* for Gree" Fi""ce Corpor!io" !/e lessor i! is *irec!fi""ci"# lese (si"ce cos! eJ&ls fir %l&e);
T/e p&rpose of !/is memor"*&m is !o o&!li"e !/e "l'sis "*recomme"*!io"s co"cer"i"# lesi"# l!er"!i%es ob!i"e* from
I$B "* MFC;
T/e obec!i%e is !o lese eJ&ipme"! 1i!/ c&rre"! selli"# priceof <40000 for !erm of 4 'ers; Bo!/ proposls reJ&ire !/! !/eeJ&ipme"! be re!&r"e* !o !/e lessor ! !/e e"* of !/e !erm; Bo!/lese !erms s!r! "* e"* ! pproxim!el' !/e sme *!es; T/e!erms of !/e leses *iffer i" o!/er respec!s 1/ic/ 1ill res&l! i"l!er"!e cco&"!i"# !re!me"!s o" !/e boos of FFC;
MFC proposl
To FFC !/is lese is cpi!l lese bec&se !/e !erms s!isf'!/e follo1i"# cri!eri
.; T/e prese"! %l&e of !/e mi"im&m lese p'me"!s issli#/!l' #re!er !/" @09 of !/e fir %l&e of !/e lese*sse! !/! is !/e prese"! %l&e of <>40=0 (see belo1) is@0;.9 of !/e fir %l&e of !/e lese* sse! (<>40=0 K<40000);
2; T/e lese fils i" !/e seco"* cri!eri co"cer"i"# !/eprese"ce of br#i" p&rc/se op!io";
=; T/e lese lso fils !/e !/ir* cpi!li!io" cri!eri i" !/!!/e lese !erm is "o! #re!er !/" 849 of !/e eco"omic lifeof !/e lese* sse! !/! is !/e lese !erm is 8.9 (4K8) of !/e eco"omic life of !/e eJ&ipme"!;
No!e !/! i" !/is cse si"ce !/ere is "o i"!eres! r!e me"!io"e*i" !/e lese proposl FFC m&s! imp&!e !/e comp"'si"creme"!l borro1i"# r!e of .49;
I$B - proposlI$B is pro%i*i"# " oper!i"# lese !o FFC si"ce !/e lese !erm(4 'ers) is less !/" 849 of !/e eco"omic life (8 'ers) of !/e
lese* sse!; T/e lese !erm is 8.;>9 (4 5 8) of !/e sse!seco"omic life; T/ere is "o br#i" p&rc/se op!io" "* !/eprese"! %l&e of mi"im&m lese p'me"!s of <>>==0 (seebelo1) represe"!s 66;89 of !/e fir %l&e ! April 2= 20.> of <40000 flli"# s/or! of !/e cri!eri of @09 !o !re! !/e lese s cpi!l lese;
+si"# fi""cil clc&l!or
P < D iel*s < >>==0
I .29N 4
PMT < (.0@60)
F < 0
T'pe .
Re"!l p'me"! of <.2000 less <.020 i" exec&!or' cos!s;
Based on the analysis above, my recommendation is for FFC tochoose the operating lease with IDB because:
1.Although the cash outflows are practically identical, the
charges to the income statement are 19% lower with theoperating lease.2.Given the current financial situation of FFC concerningliquidity, the capital lease would adversely affect thecurrent ratio.
3.Additional debt on the statement of financial position willnot be viewed well by FFC’s creditors if the capital leasealternative offered by MFC were selected. Choosing thisalternative would be violating the stipulation of RoyalMontreal Bank that FFC not increase the debt-to-equity
ratio above the current levels.
No!e !o I"s!r&c!or Some s!&*e"!s 1ill !re! !/is s cpi!lb&*#e!i"# problem "* compre !/e prese"! %l&e of !/e cs/flo1s of !/e !1o l!er"!i%es; I! m' be &sef&l 1/e" ssi#"i"#
(e) M&l/oll"* Corp; 1o&l* cco&"! for !/e lese s "oper!i"# lese si"ce
+si"# fi""cil clc&l!or
P < D iel*s <=@8>
I .29
N 8
PMT < 82=>.
F < 0
T'pe .
T/e lese !erm (8 'ers) is less !/" 849 of !/e eco"omic life (.0'ers) of !/e lese* sse!; T/e lese !erm is 809 (8 5 .0) of !/esse!s eco"omic life; T/ere is "o br#i" p&rc/se op!io" "*!/e prese"! %l&e of mi"im&m lese p'me"!s of <82=>.represe"!s 6@9 (<=@8> K <>.4000) of !/e fir %l&e ! M' 220.> of <>.4000 flli"# s/or! of !/e cri!eri of @09 !o !re! !/elese s cpi!l lese;
The carrying amount of the lease o(ligation after the a(o9eentry is D22=28>= (bl"ce from !/e ori#i"l mor!i!io"sc/e*&le <2.8026 f!er !/e &l' . 20.4 p'me"! <48.4)
T/e firs! s!ep i"%ol%es !/e clc&l!io" of !/e lese p'me"!sfor !/e ori#i"l lese perio* of = mo"!/s be#i""i"#"&r' . 20.>; For !/is lese !/e reco%erble mo&"! of 409 of !/e fir %l&e of !/e cr o" "&r' . 20.> is &se*for !/e f&!&re %l&e ! !/e e"* of !/e !/ree 'er perio*;
Excel form&l ?PMT(r!e"perp%f%!'pe)
+si"# fi""cil clc&l!or
P <(8@000)
I 0;49
N =
PMT D iel*s < .=@2;2.
F <=@400
T'pe . 9 5 .2
(<8@000 , 409 ? <=@400)
T/e seco"* s!ep is !/e clc&l!io" of !/e lese p'me"!s for !/e lese re"e1l perio* of 2> mo"!/s be#i""i"# "&r' .20.8;
Al!/o&#/ !/e fir %l&e of !/e cr ! "&r' . 20.@ of <.0000 is "o! #&r"!ee* i! is &se* i" !/e clc&l!io" of !/elese mor!i!io" sc/e*&le b' !/e lessor BM C"*;
As 1ell l!/o&#/ !/ere is smll probbili!' !/! S"*erso"1ill i"c&r **i!io"l ilome!re c/r#es for excee*i"# !/elimi!s se! i" !/e lese !/ese pe"l!ies re "o! i"cl&*e* i"!/e clc&l!io";
=; ASPE ss&mes !/! !/e riss "* be"efi!s of o1"ers/ip re"ormll' !r"sferre* !o !/e lessee "* !/e lessee s/o&l*clssif' "* cco&"! for !/e rr"#eme"! s cpi!l leseif "' o"e or more of !/e follo1i"# cri!eri is me!) T/ere is reso"ble ss&r"ce !/! !/e lessee 1ill
ob!i" o1"ers/ip of !/e lese* proper!' i"cl&*i"#!/ro&#/ br#i" p&rc/se op!io";
b) T/e lessee 1ill be"efi! from mos! of !/e sse! be"efi!s*&e !o !/e le"#!/ of !/e lese !erm; I" **i!io" "&mericl !/res/ol* is i"cl&*e* !/is is &s&ll' ss&me*!o occ&r if !/e lese !erm is 849 or more of !/e lese*proper!']s eco"omic life;
c) T/e lessor reco%ers s&bs!"!ill' ll of i!s i"%es!me"!"* er"s re!&r" o" !/! i"%es!me"!; I" **i!io" "&mericl !/res/ol* is i"cl&*e* !/is is &s&ll' ss&me*if !/e prese"! %l&e of !/e mi"im&m lese p'me"!s iseJ&l !o @09 or more of !/e fir %l&e of !/e lese*sse!;
I"cl&*i"# !/e re"e1l perio* S"*erso" is &si"# !/e cr for 4 of i!s 6 'ers of eco"omic life; T/is !r"sl!es !o 2;49"* so !/e 849 !/res/ol* is "o! rec/e*;
T/ere is "o op!io" !o p&rc/se !/! is br#i" *&ri"# !/ei"i!il or re"e1l !erms of !/e lese 1i!/ BM C"*;
T/e prese"! %l&e of !/e mi"im&m lese p'me"!s pi* b'S"*erso" I"c; is <8.8=0;00 clc&l!e* s follo1s i" !/ree s!ep pproc/
(*) For !/e co"!rc!-bse* pproc/ !/e 5ro(a(ility40eightede65ected 9alue of the e6cess mileage 5enalty must (e used inthe 5resent 9alue calculation of the lease rights and o(ligations
. is !/! !/e %e/icle is p&rc/se*; Al!/o&#/ !/e p&rc/seop!io" res&l!s i" !/e /i#/es! !o!l expe"se for fi%e 'er(Op!io" . "* =) i! lso pro%i*es !/e /i#/es! po!e"!il for #i" from !/e sle of !/e %e/icle ! !/e e"* of !/e &sef&l lifes !/e resi*&l %l&e emplo'e* i" !/e clc&l!io"s ! lesei"cep!io" mi#/! be co"ser%!i%e es!im!e;
T/e seco"* mor co"si*er!io" is !/e *iffere"ce i" !/e 1'i" 1/ic/ i"come !x 1ill be pplie* !o !/e *iffere"!l!er"!i%es pr!ic&lrl' si"ce !/e sse! is l&x&r' %e/icle"* !/ere re limi!s o" *e*&c!ibili!' &"*er !/e I"come TxAc!;
Fi"ll' cs/ flo1 co"si*er!io" s/o&l* be !e" i"!occo&"! s 1ell s fi""cil r!ios !/! re of pr!ic&lr i"!eres! !o !/e cre*i!ors "* i"%es!ors of S"*erso" I"c;
=; !/e prese"! %l&e of !/e lese p'me"!s of <>4@@2 is "o!! les! @09 of !/e fir %l&e of !/e cr;
Excel form&l ?P(r!e"perpm!f%!'pe)
+si"# fi""cil clc&l!or
P < D iel*s <>4@@2
I ;49
N =
PMT < .=@2;2.
F 0
T'pe .
A! les! o"e of !/e !/ree cri!eri 1o&l* /%e /* !o bes!isfie* for !/e lese !o be clssifie* s o!/er !/" "oper!i"# lese; T/e proper!' is recor*e* s re"!lproper!' !o BM "* 1ill be !re!e* s p'me"! of re"!b' !/e lessee &"*er !/e oper!i"# lese;
(b) T/e lese m&s! "o1 be recor*e* s " oper!i"# lese s i!is "o lo"#er cpi!l lese bec&se (.) !/e lese !erm is for
09 (.2 5 20) of !/e eco"omic life of !/e lese* sse! "*(2) !/e prese"! %l&e of !/e mi"im&m lese p'me"!s is 8@9(<26=80@ K <6000000) of !/e fir %l&e of !/e lese* sse!"* (=) !/ere is "o lo"#er br#i" p&rc/se op!io";Mi"!e""ce i"s&r"ce "* proper!' !x expe"ses 1o&l*lso be i"c&rre*;
To !/e lessee !/is lese of !/e b&il*i"# is cco&"!e* for s cpi!l lese "* !/e lese of !/e l"* is !re!e* " oper!i"#lese si"ce !/ere is "o br#i" p&rc/se op!io" for !/e proper!'"* bec&se !/e !erms of !/e lese s!isf' ! les! o"e of !/eJ&"!i!!i%e cri!eri for cpi!li!io";
T/e prese"! %l&e of !/e mi"im&m lese p'me"!s is #re!er !/" @09 of !/e fir %l&e of !/e lese* proper!' !/! is !/eprese"! %l&e of <.804>48 (see belo1) is @8;49 of !/e fir %l&eof !/e lese* proper!' (<.804>48 K <.840000);
+si"# fi""cil clc&l!or
P < D iel*s <.804>48
I 89
N .4
PMT < (.84000)
F < 0
T'pe .
T/e l"* "* b&il*i"# m&s! be co"si*ere* sepr!el' for !/ep&rpose of clssif'i"# !/e lese; T/e mi"im&m lese p'me"!sm&s! be lloc!e* be!1ee" !/e l"* "* !/e b&il*i"# i"propor!io" !o !/eir fir %l&es;
T/e por!io" of !/e #i" rel!e* !o !/e lese of !/e l"* 1/ic/ is" oper!i"# lese is mor!ie* o%er !/e !erm of !/e lese; T/epor!io" of !/e #i" rel!e* !o !/e b&il*i"# m&s! be *eferre* "*mor!ie* i" propor!io" !o !/e *epreci!io" of !/e lese* sse!;
No!e See !/e Cse Primer o" !/e S!&*e"! 1ebsi!e s 1ell s
!/e S&mmr' of !/e Cse Primer i" !/e fro"! of !/e !ex!; No!e!/! !/e firs! fe1 c/p!ers i" %ol&me . l' !/e fo&"*!io" for fi""cil repor!i"# *ecisio" mi"#;
CA 20-. CRON INC;
89er9ie0
4 CIs management has a financial re5orting (ias' that is, they do not 0antto increase the de(t that is 5resently on the (alance sheet
4 7ote that the com5any 0ants to kno0 the differences (et0een I!2 and A23E
4 2ince the com5any a55ears to ha9e other de(t, the creditors 0ill (e keyusers They 0ill 0ant o(;ecti9e information and 0ill (e concerned 0ith thede(t4to4eFuity ratio to assess ho0 le9eraged the com5any is, and there(yassess the com5anyLs a(ility to re5ay de(t
4 As the auditor you 0ill 0ant conser9ati9e and trans5arent financialstatements
Analysis and !ecommendations
Issue& Whether the lease is a ca5ital=finance lease or an o5erating lease
4 There is no e9idence that legal title 5asses to CI at the end of the lease4 There is no ?38 since the 5urchase o5tion allo0s CI to 5urchase at the
:4 The term of the lease is only 1" years, 0hich is less than +)B of the
economic life of ". years4 The 3:M%3 is as follo0s&
D1).,... +1.+# D1,.+$,11.
D1,.+$,11.=D1,-..,... ))B 0hich is less than -.B
Therefore, it 0ould a55ear, on the surface that the lease 0as an o5erating lease
8n the other hand, gi9en that the asset is manufactured s5ecifically for CI, thereis no other 5ossi(le use for the machine, and A% likely does not 0ant themachine (ack, it 0ould a55ear to (e common sense that the lease is indeed aca5ital lease that re5resents a 5urchase in su(stance (y CI The 0rittenagreement should not (e re9ie0ed in isolation (ut rather 0ithin the conte6t of the
re5orting en9ironment management (iasG and the additional un0rittenagreement to 5urchase
The 5rinci5le hinges on the transfer of the risk and re0ards of o0nershi5 In thiscase, (oth the auditor and the client kno0 that the su(stance is such that thelease has (een used as alternati9e financing in order to o(tain off4(alance4sheetfinancing' ho0e9er, the client 0ill argue that it is not a ca5ital=finance lease sinceit does not meet the criteria if numerical thresholds are used as a (enchmark7ote that under A23E the numerical thresholds are often used (ut under I!2the analysis does not hinge u5on this The key is on assessing the su(stance of the arrangement
Minor differences from the 5ers5ecti9e of the lessee include&
4 Terminology @ I!2 refers to ca5ital leases as finance leases4 /iscount rates @ A23E reFuires the use of the lo0er of the I! and I?! if I! kno0n 0hereas I!2 reFuires the use of I! if kno0n other0ise I?!G
!ecommendation& As an auditor, there is an o9erriding concern that the financialstatements are fairly 5resented, the im5lication (eing that the su(stance of alltransactions is a55ro5riately reflected in the financial statements In this case, thee9idence is too strong that this is a ca5ital=finance lease and, therefore, theauditor should argue to ca5itali<e the lease, es5ecially if the amounts arematerial
4 7ot clear 0hether AA3 is a constraint (ut users 0ill likely 0ant AA3
financial statements since they 5ro9ide more useful information/ifferences (et0een I!2 and A23E are 5ro9ided as reFuested
4 %andlords in 5articular might 0ant to see the financial statements in order to hel5 negotiate the restructuring
4 In addition, creditors and shareholders 0ould (e interested in trans5arentstatements
4 As management @ 0ould 0ant to sho0 a realistic 5icture of the state of affairs May (e (iased to make the situation look at (it 0orse so as to (ein a (etter negotiating situation
Analysis and !ecommendations
Issue& o0 to account for the three months (onus of free rent=costs of cancellation 7ot clear as to 0hether o5erating or ca5ital leases termination of aca5ital lease 0ould result in remo9al of assets=lia(ilities 0ith a gain=lossrecogni<edG
Accrue costs /o not4 If likely that the costs 0ould (e
incurred and measura(le 3erIA2 #+ @ 5resent o(ligation as aresult of 5ast transaction,
5ro(a(le outflo0 andmeasura(le essentially thesame as A23EG
4 In this case> the leases arenon4cancella(le and therefore, itis likely that there 0ould (ecosts to (reak the lease
4 The key 0ould (e 0hether theseare measura(le @ 0ould de5endon stage that negotiations 0erein
4 Measurement may (e an issuesince each landlord might makea different deal
4 2ome landlords may e9en (e
0illing to 5ro9ide financialsu55ort to the com5any to kee5the stores o5en as long as5ossi(le> cannot accrue this(enefit until recei9edcontingency accountingG
4 An e6it 5lan (y itself does notnecessarily create an o(ligation
4 Would 0ait until contracts areactually terminated
!ecommendation& It 0ould a55ear that the negotiations 0ere at a 9ery5reliminary stage and that the landlords might ha9e (een 0illing to offer someinducements=concessions to the com5any to stay longer Therefore, the outcomeof the uncertainty 0as not yet determina(le and recognition 0ould not (e
recommended This 0ould (e further su55orted since, e9en if it 0ere argued thatthe costs 0ere likely, it is difficult to measure the cost At the one end of thes5ectrum, the landlords could reFuire the full commitment to the end of the lease
(e honoured At the other end, the landlord might agree to a lesser amount, ie,the com5any 0ould 5ay rent until a ne0 tenant is found
3ur5ose>to 5ro9ide the student 0ith an ethics case in9ol9ing the ca5itali<ation
criteria a55lied to technology that is fast (ecoming o(solete for the ca5itali<ationand contract4(ased a55roaches The student must assess the 9alidity of thearguments gi9en for not ca5itali<ing eFui5ment and make recommendations
WA ".4" Time ")@#) minutesG
3ur5ose>to 5ro9ide the student 0ith an understanding of the different im5acts of the current A23E and I!2 lease treatments on financial statements and the5ro5osed contract4(ased a55roach The student must descri(e the changes in(asic financial ratios under these different standards The student is also reFuiredto use the conce5tual frame0ork to e65lain the contract4(ased a55roach for leases, 0hich a55ears to gain more su55ort from the ;oint A2?4IA2? studygrou5
WA ".4# Time $.@$) minutesG
3ur5ose>to 5ro9ide the student 0ith an understanding of the t0o a55roaches(eing considered for lessor accounting @ derecognition a55roach and the5erformance o(ligation a55roach It also reFuires students to demonstrate their understanding of the initial recording of a lease under the t0o alternati9es
WA ".4$ Time $. @ $) minutesG
3ur5ose>to 5ro9ide the student 0ith an understanding of the theoretical reasonsfor reFuiring certain leases to (e ca5itali<ed (y the lessee It also reFuiresstudents to demonstrate their understanding of the classification of three leasesThe student determines ho0 the lessee should classify each lease, 0hat amountshould (e recorded as a lia(ility at the ince5tion of each lease, and ho0 thelessee should record each minimum lease 5ayment for each lease
WA ".4) Time #. @ #) minutesG
3ur5ose>to 5ro9ide the student 0ith an o55ortunity to com5are and contrast the
accounting for leases under A23E, I!2 and the contract (ased a55roach and tounderstand the underlying conce5ts for these different treatments
aG The retail outlet leases& ?ased on the lease terms and conditions for theretail outlets noted in the Fuestion, these leases re5resent o5eratingleases %eases that are o5erating leases are recogni<ed and re5orted in
the same manner under (oth A23E and I!2& the monthly lease5ayments and contingent rental 5ayments are all e65ensed as incurred
?uilding %ease& The information notes that the (uilding lease has (eenassessed against the ca5itali<ation criteria under 5ri9ate enter5riseaccounting standards, and found to Fualify as an o5erating leaseo0e9er, there are a fe0 differences in these criteria under I!2 thatmight change the final conclusion as noted (elo0&
1 Transfer of (enefits and risks& In assessing the transfer of risks andre0ards, I!2 also reFuires an assessment of the degree to 0hich anasset is s5eciali<ed and of use only to the lessee 0ithout ma;or e65ense
to the lessor If it is found on re9ie0, that the ne0 facility is so s5eciali<edthat the lessor 0ould ha9e difficulty leasing to another tenant 0ithout a lotof e6tra costs, then the lease contract transfers su(stantially all of the(enefits and risks of 5ro5erty o0nershi5, and should (e ca5itali<edConsidering that the (uilding 0as designed s5ecifically for 25oronsneeds, su(stantial amounts of (enefits may (e transferred to 25oronThus, careful re9ie0 of the lease contract is reFuired to identify anysu(stantial transfer of risks, including the reFuirement to 5ay 5ro5erty ta6increases
" /e5ending on 0hich interest rate 0as used to test the minimum lease5ayment criterion, 25oron may need to account for the lease as a finance
lease under I!2 While CICA and(ook 3art II, 2ection #.) s5ecifiesthe use of the lo0er of the interest rate im5licit in the lease and thelesseeLs incremental (orro0ing rate, IA2 1+ s5ecifies use of the interestrate im5licit in the lease 0hen it is 5ractica(ly determina(le' other0ise, thelesseeLs incremental (orro0ing rate is used
(G To %ouise ?ren,2u(;ect& Accounting Treatment for %eases under the a55roach of theA2?4IA2? ;oint 5ro;ect
The IA2? and A2?, through a Joint International Working rou5, issuedan E65osure /raft changing the accounting for leases in ".1., and (ased
on the comments recei9ed are currently looking at a 9ariety of o5tionsrelated to financial re5orting for leases As indicated in the ".1. E65osure/raft, the contract (ased a55roach is (eing considered as they intend tochoose a model that 0ill rely on asset and lia(ility definitions in theconce5tual frame0ork This a55roach is (ased on the idea that allarrangements that 5ro9ide one 5arty the right to use an item of another 5arty should (e accounted for similarly
The contract (ased a55roach is e65ected to (e more useful to users assome entities are not recogni<ing a su(stantial amount of leaseo(ligations that meet the definition of lia(ilities under the conce5tual
frame0ork Nnder the contract (ased a55roach, the ca5ital or financeG ando5erating lease distinction 0ould disa55ear and most leases 0ould Fualifyfor recognition as assets and lia(ilities (y the lessee
!etail outlet leases&?ased on feed(ack recei9ed, the IA2? and A2? are considering allo0ingthe Ostraight4lineP a55roach for leases in certain circumstances Thisa55roach 0ould (e similar to 0hat is used for o5erating leases currentlyo0e9er, if the lease is Ofor a ma;or 5art of the economic life of underlyingassetP then the lease 0ould need to (e ca5itali<ed If this latter a55roach isado5ted, these leases 0ill (e sho0n on the statement of financial 5osition
An intangi(le asset for the contractual lease rights 0ill (e recogni<ed, and
amorti<ed o9er a systematic 5eriod, likely a straight4line (asis o9er thelease term A lia(ility for the contractual lease o(ligation 0ill (e recogni<edand amorti<ed using the a55ro5riate discount rate o9er the lease term As5ayments are made, the o(ligation 0ill (e reduced and interest e65ense0ill (e recogni<ed There are three issues 0ith res5ect to these leases that0ould ha9e to (e assessed&
1 What is the lease termQ The lease term should (e the Olongest leaseterm that is more likely than notP to occur This 0ould (e 1. years for thecurrent retail leases @ the initial term and the rene0al 5eriod
" What are the 5ayments to (e included in the contractual o(ligationsQ In
this case, the monthly 5ayments and the contingent 5ayments 0ould (eincluded in determining the 9alue of the o(ligation The 9alue for thecontingent rental 5ayments 0ould (e determined using 5ro(a(ility 0eightede65ected 9alues o9er the term of the lease The 9alue of these contingent5ayments 0ould ha9e to (e reassessed at each re5orting 5eriod, 0ith anychanges related to the current and 5ast 5eriod contingencies (eingre5orted immediately into income and any im5act on future 5eriods 0ouldchange the amount of the o(ligation
# What discount rate should (e used in determining the amount of theo(ligation and assetQ 25orons incremental (orro0ing rate 0ould (e usedto discount the 5ayments to determine the contractual o(ligation
89erall, if the Com5any is leasing relati9ely ne0 (uildings, it may end u5(eing a(le to account for the retail outlet leases as Ostraight4line leasesP asthey may not (e long enough to re5resent a ma;or 5art of the economic lifeof the 5ro5erty
?uilding lease& or the (uilding lease, the first assessment that needs to(e made is 0hether su(stantially all of the risks and re0ards ha9e (eentransferred since the (uilding is uniFue to 25orons 5ur5oses and the
lease, (y design, 5erha5s earns the lessor a fi6ed return If this is thecase, then the lease 0ould (e seen to (e a 5urchase in su(stance, and the9alue of the contractual o(ligation and the (uilding as an asset 0ould (erecognised The (uilding 0ould (e de5reciated o9er its useful life, and theo(ligation 0ould (e reduced as 5ayments are made, and interest ise65ensed If it is found that the lease does not su(stantially transfer therisks and re0ards, then an intangi(le asset is recogni<ed instead andamorti<ed o9er some systematic (asis @ likely straight4line o9er the ". year term of the lease The amount of the o(ligation 0ould (e the same ineither case or this assessment, the lease term 0ould (e ". years, andthe discount rate 0ould (e 25orons incremental (orro0ing rate %astly,de5ending on ho0 long the o9erall life of the (uilding is, the Com5any may
end u5 (eing a(le to account for the retail outlet leases as Ostraight4lineleasesP as they may not (e long enough to re5resent a ma;or 5art of theeconomic life of the 5ro5erty o0e9er, gi9en a ". year lease, the (uildinglease is more likely to (e reFuired to (e ca5itali<ed than the retail leases
The im5act of ca5itali<ation of the leases on the cash flo0 statement 0ould(e to remo9e the lease 5ayments from o5erating cash flo0s, and instead,the 5ortion of the 5ayment that re5resents interest 0ould (e sho0n aseither o5erating or financing de5ending on the com5anys 5olicyG and thereduction in the o(ligation 0ould (e recorded as a financing acti9ity This0ould cause the o5erating cash flo0 to (e higher under the contract (aseda55roach
cG A55endi6& If the leases 0ere all considered straight4line leases, than there0ould (e little or no im5act on the Com5anys ratios o0e9er, if theleases are ca5itali<ed, it 0ould ha9e the follo0ing im5act on these (asic
ratios
3rofita(ility3rofit margin The ratio 0ill (e lo0er in the earlier years and
higher in the later years under the contract4(asedlease treatment (ecause 1G o5erating leasesrecogni<e lease e65enses e9enly during the leaseterm' and "G interest e65ense and amorti<atione65enses, 0hich are recorded under a ca5itallease, are higher in the earlier years
!eturn on
assets
%o0er& Assets, the denominator, 0ould increase (y
the 9alue of the intangi(le assets The net income0ill (e lo0er in the earlier years due to the higherinterest and amorti<ation e65enses As a result,the return on assets 0ill (e lo0er 89er time, this0ill increase as the asset is reduced and netincome is higher 0ith the lo0er amounts chargedfor interest and amorti<ation e65enses
!eturn oneFuity
%o0er& The return 0ould decrease in the earlieryears and so 0ould retained earnings in eFuity forthe same reasons noted a(o9e
!isk/e(t4to4eFuity igher& /e(t 0ould increase (y the contractual
lease o(ligation amount 0hile eFuity retainedearningsG 0ould decrease in the earlier yearsG
Times interestearned
E?IT 0ould increase (ecause although there is anamorti<ation e65ense this may (e lo0er than therent e65ense that 0ould disa55ear o0e9er, thedenominator, interest e65ense, 0ould increase as0ell 2o it is difficult to assess the o9erall im5act0ithout further details
2ol9ency85erating cashflo0s to total
de(t
As cash outflo0s for the 5rinci5al (alance of thelease o(ligation 0ould (e re5orted under Pfinancing
acti9itiesP, the cash flo0 from o5erating acti9ities0ould (e higher At the same time, the amount oftotal de(t, 0hich is the denominator of this ratio,0ould increase (y the lease o(ligation and later getsmaller as the o(ligation gets re5aid 2o it isdifficult to assess the e6act im5act 0ithout furtherdetails
aG The O5erformance o(ligation a55roachP is discussed in the te6t (ook under the contract4(ased a55roach In this a55roach, the lessor is granting theright to use the asset to the lessee o9er the term of the lease The lessor
does not lose control of the asset, 0hich continues to (e reflected on thestatement of financial 5osition In this case, the lessor has the right torecei9e the lease 5ayments, and an unconditional o(ligation to 5ermit theuse of the asset o9er the term of the lease As a conseFuence, at the timethe lease is entered into, a lease recei9a(le is recorded as an asset and a5erformance o(ligation is recorded as the offsetting lia(ility The recei9a(leand o(ligation are calculated to (e the 5resent 9alue of the lease5ayments As the lessor discharges the 5erformance o(ligation, leasingincome is recogni<ed into income As 5ayments are recei9ed from thelessee, interest income is recogni<ed and the recei9a(le is reducedinally, the asset 0ould continue to (e de5reciated o9er its useful life, 8n
the statement of financial 5osition, the asset, the lease recei9a(le and the5erformance o(ligation are sho0n as a net lia(ility or asset 8n thestatement of com5rehensi9e income, the lessor 0ould re5ort leasingincome, interest income and de5reciation e65ense
(G The Oderecognition a55roachP assumes that a 5ortion of the leased asset issold 0hen the rights of use are transferred to the lessee under the leaseagreement This reFuires that the leased assets (e derecogni<ed Thelease contract is a 5romise to transfer the asset to the lessee and so oncedeli9ery is com5leted, the 5erformance o(ligation has (een met and nolonger e6ists In derecogni<ing the leased asset, a recei9a(le for the
5resent 9alue of the lease 5ayments and a residual 9alue are recogni<edThe residual 9alue is a non4financial asset 0hich re5resents the rights toeconomic (enefits from the asset arising after the lease term Theseeconomic (enefits 0ould arise from su(seFuent sale of the asset or re4leasing the asset under a ne0 contract The com5any 0ill recogni<ere9enue on the sale of the asset, and then interest income on therecei9a(le as the lease 5ayments are recei9ed The im5act on thestatement of financial 5osition 0ill (e a recei9a(le and a residual 9alue asassets The im5act on the statement of com5rehensi9e income 0ill sho0re9enue from the sale of the leased asset, and interest income o9er theterm of the lease
cG Nsing the information gi9en, (elo0 is 0hat 0ould (e sho0n on thestatement of financial 5osition for assets and lia(ilities on initial recognitionof the lease&
aG In addition to triggering a gain, most likely Truttman 0as moti9ated to selland lease(ack eFui5ment to generate some much needed cash flo0 Theinterest rate offered (y the leasing com5any 0as most likely fa9oura(le
from the 5oint of 9ie0 of Truttman, in com5arison to other sources of financing
(G 1 A lease is categori<ed as a finance lease if, at the date of the leaseagreement, it meets any one of three criteria under A23E or four criteria under I!2 As the lease has no 5ro9ision for Truttman toreacFuire o0nershi5 of the eFui5ment, it fails the criteria of transfer of o0nershi5 at the end of the lease under (oth I!2 and A23E' there isno (argain 5urchase o5tion Truttmans lease 5ayments, 0ith a5resent 9alue eFualling +)B of the eFui5ments fair 9alue, fails thecriterion for a 5resent 9alue eFualling or e6ceeding -.B of the
eFui5ments fair 9alue for A23E o0e9er, under I!2, since thereare no O(right linesP one 0ould ha9e to ;udgementally determine if the5resent 9alue of the 5ayments allo0s the lessor to reco9er su(stantially all of its in9estment in the 5ro5erty 0ith an a55ro5riaterate of return This criteria is likely not to (e met under I!2 eitherNnder A23E, the final criterion is 0hether its term allo0s the lessee tosu(stantially use the (uilding for its economic useful life In this case,+#B is (elo0 the +)B threshold and therefore the criteria 0ould not(e met In this case, under A23E the lease 0ould (e classified as ano5erating lease o0e9er, under I!2, since there are again no (rightlies, one could conclude that +#B of the economic life is long enough
to recei9e su(stantially all of the economic (enefits In this case, thelease might (e recorded as a finance lease The final criteria under I!2 0ould look at 0hether or not the asset is s5eciali<ed for thelessees use, 0hich in this case, does not seem to (e the case
" Com5arisons of eFui5ments fair 9alue to its lease 5ayments 5resent9alue, and of its useful life to the lease term, are used to determine0hether the lease is eFui9alent to an instalment sale and is therefore afinance lease If the fair 9alue test or the useful life test is met, there isan indication that the lessee is o(taining most of the (enefits that theasset has to offer
cG 85erating lease treatment under A23E& Truttman should account for thesale 5ortion of the sale4lease(ack transaction at 8cto(er #1, ".1$, (yincreasing cash for the sale 5rice for D1# million, decreasing (uilding and
related accumulated de5reciationG (y the carrying amount of D1. million,and recogni<ing a deferred gain on sale of D# million for the e6cess of theeFui5ments carrying amount o9er its sale 5rice The deferred gain 0ill (erecogni<ed o9er the term of the lease If the sale 5rice is D1 million greater than the fair 9alue, the total gain deferred 0ould (e D$ million All of thegain o9er the carrying 9alue is deferred and amorti<ed o9er the o5eratinglease term The o5erating lease 5ayments are then recorded as ane65ense as made
85erating lease treatment under I!2& I!2 recogni<es that if an o5eratinglease is taken (ack, then the asset has (een technically sold, and therefore
all of the gain of D# million, re5resenting the difference (et0een fair 9alueD1# millionG and the carrying 9alue D1. millionG is fully recogni<ed intoincome at the time of the sale on 8cto(er #1, ".1$ If, as 5ro5osed in theFuestion, the selling 5rice 0as actually greater than its fair 9alue, then the5ortion of the selling 5rice greater than fair 9alue of D1 million 0ould (erecogni<ed as a deferred gain and amorti<ed o9er the term of the lease,and the D# million gain 0ould (e recogni<ed immediately The o5eratinglease 5ayments are then recorded as an e65ense as made during7o9em(er and /ecem(er, ".1$
dG Ca5ital lease treatment under A23E& Truttman should account for the sale5ortion of the sale4lease(ack transaction at 8cto(er #1, ".1$, (yincreasing cash for the sale 5rice for D1# million, decreasing (uilding andrelated accumulated de5reciationG (y the carrying amount of D1. million,and recogni<ing a deferred gain on sale of D# million for the e6cess of theeFui5ments carrying amount o9er its sale 5rice The deferred gain 0ill (erecogni<ed on the same (asis as de5reciation of the leased asset At thesame time, a ca5ital leased asset and an offsetting ca5ital lease o(ligation0ill (e recogni<ed and 0ill eFual the 5resent 9alue of the lease 5ayments
At the end of the year, /ecem(er #1, ".1$, Truttman 0ould recogni<einterest e65ense on the o(ligation at the effecti9e interest rate, 5rinci5alreduction in the o(ligation, and de5reciation e65ense on the (uildingde5reciated o9er the term of the leaseG
Accrued interest on the o(ligation for the 5eriod from 7o9em(er 1, to/ecem(er #1, ".1$, 0ill a55ear in the current lia(ilities section of thestatement of financial 5osition along 0ith the 5rinci5al 5ortion of the firstlease 5ayment due 8cto(er #., ".1)
The remaining 5ortion of the 5rinci5al to (e re5aid (eyond ".1) 0ill (e
re5orted as a non4current lia(ility The cash flo0 statement for the year ended /ecem(er #1, ".1$, 0ill sho0 5roceeds from the sale of theeFui5ment as a source of cash in the in9esting section of the cash flo0statement or the o5erating acti9ities section, 5re5ared using the indirectformat, the gain on the sale of the eFui5ment and the de5reciation e65ense0ill (e added (ack to income as 0ell as the increase in the interest 5aya(lefor the accrual recorded for the lease at the end of the yearG
inally the ca5ital lease and the related o(ligation under ca5ital lease fromthe lease(ack transaction are a non4cash financing and in9estingtransaction that 0ill not a55ear on the face of the cash flo0 statement (ut
0ill (e re5orted in the notes to the financial statements
Ca5ital lease treatment under I!2& Truttman should account for the sale5ortion of the sale4lease(ack transaction at 8cto(er #1, ".1$, (yincreasing cash for the sale 5rice for D1# million, decreasing (uilding andrelated accumulated de5reciationG (y the carrying amount of D1. million,and recogni<ing a deferred gain on sale of D# million for the e6cess of theeFui5ments carrying amount o9er its sale 5rice The deferred gain 0ill (erecogni<ed o9er the term of the lease 0hich differs from A23EG At thesame time, a ca5ital leased asset and an offsetting ca5ital lease o(ligation0ill (e recogni<ed and eFual to the 5resent 9alue of the lease 5ayments Atthe end of the year, /ecem(er #1, ".1$, Truttman 0ould recogni<e intereste65ense on the o(ligation at the effecti9e interest rate, 5rinci5al reduction inthe o(ligation, and de5reciation e65ense on the (uilding de5reciated o9er the term of the leaseG
Accrued interest on the o(ligation for the 5eriod from 7o9em(er 1, to/ecem(er #1, ".1$, 0ill a55ear in the current lia(ilities section of thestatement of financial 5osition along 0ith the 5rinci5al 5ortion of the firstlease 5ayment due 8cto(er #., ".1)
The remaining 5ortion of the 5rinci5al to (e re5aid (eyond ".1) 0ill (ere5orted as a non4current lia(ility The cash flo0 statement for the year ended /ecem(er #1, ".1$, 0ill sho0 5roceeds from the sale of theeFui5ment as a source of cash in the in9esting section of the cash flo0statement or the o5erating acti9ities section, if 5re5ared using the indirectformat, the gain on the sale of the eFui5ment and the de5reciation e65ense0ill (e added (ack to income as 0ell as the increase in the interest 5aya(lefor the accrual recorded on the lease at the end of the year
inally the ca5ital lease and the related o(ligation under ca5ital lease fromthe lease(ack transaction are a non4cash financing and in9estingtransaction that 0ill not a55ear on the face of the cash flo0 statement (ut0ill (e re5orted in the notes to the financial statements
There are many differences (et0een I!2 and A23E and the contract(ased a55roach 0ith res5ect to measurement and re5orting for leases3rimarily, A23E has (een 0ritten to follo0 historical Canadian 5ractice
A23E has also (een designed 0ith the 5rimary user in mind of (eing thecreditor, rather than outside shareholders and creditors i9en thatgenerally creditors ha9e access to management' the disclosure has also(een sim5lified The contract (ased a55roach has (een designed toeliminate the reFuirement to ar(itrarily classify a lease into o5erating or ca5ital Nnder this a55roach, all leases are treated the same and 0ill im5actthe statement of financial 5osition and the statement of com5rehensi9eincome in the same manner Any 5ercei9ed mani5ulation to kee5 leases off the (alance sheet is eliminated
In most areas of lease accounting at the time of 0riting of this (ook, I!2
and A23E are con9erged There are some su(tle differences that arehighlighted (elo0&
a) A23E and I!2 use the classification a55roach for leases @ either o5erating or ca5ital A23E refers to ca5ital leases and o5eratingleases for lessees, and o5erating, sales4ty5e or direct financing leasesfor lessors I!2 uses the term Ofinance leasesP or o5erating leasesfor lessees or lessors In contrast, the contract (ased a55roach doesnot reFuire classification of leases, since they are all treated the same
(G A23E has three criteria to assess for determining lease treatment
and numerical thresholds are 5ro9ided to assist 0ith this I!2reFuires that the criteria (e a55lied more ;udgmentally, 0ith no O(rightlinesP of numerical thresholds 5ro9ided In addition, I!2 has onemore criteria to assess 0hich looks at the uniFueness of the assets5ecifically designed for use (y only the lessee The only as5ect thatthe contract (ased a55roach 0ould assess is to determine if the leaseis in su(stance a 5urchase or sale, and if so, 0ould not (e recogni<edunder the lease recognition and measurement standards
cG or an o5erating lease, (oth A23E and I!2 0ould recogni<e thelease 5ayments as they are made, either to income or e65ense for the
lessor and lessee, res5ecti9ely
dG or the contract (ased a55roach for the lessee, the rights to use theasset are recogni<ed as an intangi(le asset and contractual leaseo(ligations are recogni<ed as a lia(ility ?oth of these amounts aredetermined using the 5resent 9alue of the lease 5ayments
Amorti<ation of the intangi(le right and interest e65ense on theo(ligation is recogni<ed o9er the term of the lease The conce5t
(ehind the contract (ased a55roach is that a contractual o(ligation has
(een entered into on the signing of the lease, and this o(ligationshould (e re5orted on the statement of financial 5osition As the rightto the asset is used, amorti<ation is re5orted' and as the o(ligation is5aid, the o(ligation is reduced In this 0ay, it does not matter 0hatty5e of lease is entered into, and ;udgment is no longer reFuired todetermine if the lease should (e treated as o5erating or a financelease The contract (ased a55roach uses the lessees incremental(orro0ing rate or the contract (ased a55roach for the lessor, thetreatment is similar as descri(ed a(o9e e6ce5t a lease recei9a(le andoffsetting 5erformance o(ligation is re5orted
eG or ca5ital financeG leases, (oth I!2 and A23E recogni<e the5resent 9alue of the lease 5ayments as a lease o(ligation and leasedasset for the lessee As the lease term 5rogresses, the asset isamorti<ed and interest e65ense is recogni<ed on the lease o(ligation3ayments reduce the lease o(ligation I!2 uses the interest rateim5lied in the lease 0hen it can (e reasona(ly determined, or thelessees incremental (orro0ing rate A23E uses the lo0er of theim5lied lease rate or the lessees incremental (orro0ing rate Nnder the contract (ased a55roach, the treatment is the same as descri(eda(o9e since no differentiation is made (et0een o5erating and financeleases o0e9er, 0hen the IA2? issues its ne0 E65osure /raft
e65ected in ".1#G this may change In 5articular, I!2 is consideringallo0ing some leases to Fualify as straight4line leases 0ith accountingsimilar to o5erating leasesG
fG or the lessor, A23E has t0o other recognition criteria 0hich I!2does not s5ecifically reFuire under the lease standards, (ut does (ydefault under re9enue recognition Accounting treatment is the sameunder (oth standards
gG There are differences in 0hat 0ould (e included in the lease 5aymentsI!2 and A23E ha9e similar standards, (ut the contract a55roach
0ould also reFuire that contingent 5ayments under the leaseagreements (e estimated
hG /isclosure is minimi<ed for A23E or I!2, more e6tensi9edisclosure is reFuired including reconciliations and additionalinformation a(out terms of the leases
aG As indicated in note # oG of 2ho55ers financial statements, the Com5anyleases most of its store locations and office s5ace %eases that transfer su(stantially all the risks and (enefits of o0nershi5 are recorded as financingleases, and are included 0ith 5ro5erty and eFui5ment, accounts 5aya(le andaccrued lia(ilities and other long4term lia(ilities as a55lica(le All other leases areconsidered o5erating leases and the related rent is e65ensed on a straight4line(asis o9er the term of the lease, any rent4free 5eriods are also amorti<ed on astraight4line (asis %andlord inducements are also deferred and amorti<ed on astraight4line (asis and reduce rent e65ense
The Com5any has sale4lease(ack arrangements for some of its stores Theleases are accounted for as financing or o5erating (ased on their nature Anygains reali<ed on dis5osal of sale4lease(acks that are financing in nature, aredeferred and amorti<ed on a straight4line (asis o9er the shorter of the estimateduseful life of the leased asset and the lease term E6ecutory costs, such as5ayments for real estate ta6es, maintenance and insurance are e65ensed in the5eriod to 0hich they relate
(G As discussed in 5art aG a(o9e, leases that transfer su(stantially all therisks and (enefits of o0nershi5 are recorded as financing leases, and areincluded 0ith 5ro5erty and eFui5ment, accounts 5aya(le and accruedlia(ilities and other long4term lia(ilities as a55lica(le 3er note # oG of 2ho55ers financial statements, other accounts affected (y leases includethose related gains reali<ed on the dis5osal of the real estate 5ro5ertiesrelated to financingG sale4lease(ack transactions ains reali<ed on thedis5osal of real estate 5ro5erties done at fair 9alue and that are o5eratingin nature, are recogni<ed 0ithin o5erating and administrati9e e65enses inthe consolidated statements of earnings E6ecutory costs such as realestate ta6es, maintenance and insurance These amounts are e65ensed inthe 5eriod to 0hich they relate 5resuma(ly in the related statement of earnings accountsG There are no dollar amounts re5orted se5arately for the year ended /ec #1, ".11 on the consolidated statement of financial5osition and the consolidated statement of earnings
cG %ease 5ayments for finance leases are included in t0o ty5es of acti9itieson the statement of cash flo0s& o5erating acti9ities and financing acti9ities
The 5ortion that re5resents interest e65ense is re5orted in Ofinancee65ensesP of D$,.# thousand of 0hich D,)- thousand relates tofinancing leases 5er note 1", 5rior to the amount that may ha9e (eennetted off as 5art of Ofinance e65ense ca5itali<edPG Also included ino5erating acti9ities 9ia 7et earningsG 0ould (e the o5erating lease costsand e6ecutory costs 5aid Nnder financing acti9ities, the re5ayment of financing lease o(ligations re5resenting the reduction of 5rinci5le of D",1+# thousand is sho0n
dG in thousandsG/ec #1, ".11
Net earnings $ 613,934______
Average total assets ($7,300,310 + $7,044,197) ÷ 2Re!&r" o" !o!l sse!s 6;9
Total lia(ilities D#,.#",$.2hareholders eFuity $,"+,#.To!l *eb!-!o-eJ&i!' r!io 0;8.
eG Nnder the contract (ased a55roach, the asset that is acFuired (y a lesseeis not the 5hysical 5ro5erty that is leased' rather, it is an intangi(le asset
that re5resents the right to use the asset that is con9eyed under the leaseagreement The lia(ility is the contractual o(ligation to make lease5ayments The asset and the o(ligation are initially recorded at the 5resent9alue of the lease 5ayments or the lessee, the intangi(le asset is thenamorti<ed o9er the term of the lease on some systematic (asis to earnings,and o(ligation is reduced (y 5ayments less the interest charge
In the case of 2ho55ers, 0e 0ill look at each of the leases indi9idually&1 inance leases @ for leases that are eFui9alent to in4su(stance
acFuisitions, accounting 0ould (e similar to 5resent4day finance leases" 8ther o5erating leases as lessee 4 2ome leases that are currently
o5erating leases may end u5 (eing ca5itali<ed, 0ith the related leasedassets re5resenting a right under intangi(le assets, rather than as5ro5erty, 5lant and eFui5ment o0e9er, leases of 5ro5erty land or a(uilding or (othG 0ould ty5ically (e accounted for using the straight4linea55roach, 0hich is similar to current o5erating leases This 0ould occur unless the related lease term is for the ma;or 5ortion of the economic lifeof the underlying (uilding, or 0here the 9alue of the lease accounts for su(stantially all of the (uildings fair 9alue
RA20-2 CANA$IAN NATIONAL RAILA COMPAN AN$CANA$IAN PACIFIC RAILA LIMITE$
aG Canadian 7ational !ail0ay C7!G discloses the cost, accumulatedde5reciation, and net (ook 9alue of 5ro5erties held under ca5ital leases in
7ote ), P3ro5ertiesP totalling a net carrying 9alue of D1,#+ million Thisnote also indicates that such 5ro5erties consist 5rimarily of track androad0ay, rolling stock, (uildings, and other As footnote to this schedule,C7! also indicates that included in track and road0ay is the cost of landof 0hich D1. million is a right of 0ay and has (een recorded as a ca5italleaseC7! discloses in 7ote - an amount of Oca5ital lease o(ligations andotherP in its long4term de(t note of D-)+ million In 7ote 1+, C7! disclosesthe amount of future minimum lease 5ayments for its o5erating leases,ca5ital leases and in total in its ma;or commitments and contingenciesnote The note also identifies that the com5any has o5erating and ca5italleases, mainly for locomoti9es, freight cars, and intermodal eFui5ment It
also discloses the amount of im5uted interest on its ca5ital leases rangingfrom .+B to 11B and the 5resent 9alue of the minimum lease 5aymentsat current rate included in de(t of D-)) million Also in this note, C7!indicates that under some of its ca5ital leases, it has the o5tion to 5urchasethe asset at a fi6ed amount We are also told that automoti9e eFui5ment isleased under o5erating leases 0ith one year, non4cancella(le terms andthat the estimated rental 5ayment is D#. million inally, rent e65ense for allo5erating leases 0as D1$# million for the ".11 fiscal year
Canadian 3acific !ail0ay C3!G discloses in 7ote 1) the net amount of assets under ca5ital lease and the amount of related accumulated
de5reciation in its net 5ro5erties note totalling a net carrying 9alue of D#)1million C3! discloses in 7ote "., the amount of o(ligations under ca5italleases of D" million, the amount of minimum 5ayments for its ca5italleases, the amount of related im5uted interest and 5resent 9alue of these5ayments, and the related current 5ortion of the o(ligations in its long4termde(t note Interest rates used for the ca5ital lease o(ligations range from$-.B to +#B In note "-, the amount of minimum 5ayments for itso5erating leases is included in its commitments and contingencies note
/etailed accounts and amounts for (oth com5anies are 5resented (elo0
aG Yes, they a55ear to ha9e 5ro9ided all the lease disclosures reFuired (ythe accounting standards
(G The leases of (oth com5anies are long term C7!s o5erating andca5ital leases e6tend at least se9en years from the (alance sheet date,since the note refers to O".1+ and thereafterP C3!s o5erating leasese6tend to at least ".1 and the ca5ital leases e6tend to "." and ".#1
cG The future minimum annual rental commitments under each ty5e of lease for each com5any are 5resented (elo0 E9en though thecom5anies are in the same industry, there is a difference 0ith res5ect toho0 they 5ro9ide for ca5acity as e9idenced (y the fact that they ha9edifferent 5ro5ortions of o5erating 9ersus ca5ital leases measured interms of minimum lease 5ayments C7! has a higher 5ro5ortion of
ca5ital leases than C3!, and C3! has a higher 5ro5ortion of o5eratingleases than does C7!
In millions of CD CNR 9 CPR B
Minimum lease 5ayments 4o5erating
D) #$+B
D1# )B
Minimum lease 5ayments 4ca5ital
1,")$ )#B
$"+ #$$B
dG The de(t4to4total assets ratios for each com5any at /ecem(er #1, ".11,are 5resented (elo0
eG C7! 5resents as 5art of its Management /iscussion R Analysis anestimate of the 5resent 9alue of its o5erating lease commitments asD)$" million C3! does not 5ro9ide a similar estimate, (ut (y using a
B discount rate, the ca5itali<ed 9alue of the off4(alance4sheeto5erating leases can (e estimated 7ote& the schedule (elo0 assumesthat all of the Othereafter 5aymentsP 0ould (e made in year ".1+, 0hichis likely not correctG
year5erio
d CPRCPR P of p'me"!s^9
3ayments
".1" 1. D1$) 1#
".1# ". 1#1 11".1$ #. - .".1) $. # )+".1 ). ) $
Thereafter . "-# ".
Total 5ayments D1# D)$-
fG These o5erating leases 0ould (e recorded as& Increase to intangi(leassets for the right of use and an increase to contractual lease o(ligations
To make an accurate ad;ustment for the contract4(ased a55roach, 0e0ould ha9e needed details of the 5ayments for each year after ".1+2ome of these leases may (e due much later than ".1+, 0hich 0ouldchange the calculation of the 5resent 9alues We ha9e also had to makeassum5tions a(out the effecti9e interest rates that might not (e correct
Also, the contract (ased a55roach 0ould include any rene0al terms that0ere likely to (e used and any contingent rents And, if the re9ised IA2?E65osure /raft allo0s for straight4line leases in some circumstances, 0e0ould need to assess 0hether any com5anies leases 0ould Fualify asstraight4line leases inally, 0e 0ere una(le to make ad;ustments on thestatement of earnings In this case, the annual lease e65ense 0ould (e
eliminated, and its 5lace 0ould (e amorti<ation of the intangi(le asset on astraight4line (asis o9er the term of the lease and the interest charge on thelease o(ligation for the year
gG The de(t4to4total assets ratios, recalculated to include the ca5itali<ed 9alueof the o5erating leases, are 5resented (elo0 ?y including the ca5itali<edamount of the o5erating leases in the lia(ilities calculation, the de(t4to4total
assets ratios of (oth com5anies are some0hat higher or C7!, the ratiohas increased from )-.B to 1.B, 0hich is only a #$B increaseo0e9er, for C3!, that uses 5redominantly more o5erating lease thanC7!, the ratio has increased from +1B to +1+B, 0hich re5resents a-B increase
CNR CPR%ia(ilities as re5orted D1),#$ D-,$1.Ca5itali<ed 9alue of o5erating leases )$" )$-!e9ised %ia(ilities including ca5itali<ed9alue of o5erating leasesG 1), 1.,11)-
Total Assets ",." 1$,11../e(t=Total Assets ratio 1.B +1+B
hG In the case of C7! and C3! a(o9e, the com5anies use different5ercentages of o0ned 9ersus leased assets In order to 5ro5erly com5arethe com5anies 0ith res5ect to de(t ratios and asset turno9er ratios, it isim5ortant to reflect all the assets (eing used along 0ith the o(ligationsincurred to use those assets ConseFuently, the contract (ased a55roach0ould ensure that the assets and related o(ligations are recogni<ed andmeasured a55ro5riately on the statement of financial 5osition In trying to
make the ad;ustments from the current notes for C7! and C3!, someassum5tions 0ere made as to the lease terms and the interest rates 0hichmight not (e correct And as noted a(o9e, 0e are also missing informationto make all of the ad;ustments reFuired If the com5anies ado5ted contract(ased a55roaches, these ad;ustments 0ould no longer (e reFuired
aG As disclosed in 7ote $, 2ummary of 2ignificant Accounting 3olicies, thecom5any e65lains that it Oconducts all of its (usiness from leased5remisesP These leases ha9e rene0al terms, o9er 0hich the com5any
de5reciates the leasehold im5ro9ements 0hen rene0al is Oreasona(lyassuredP All of its leases of 5remises are considered o5erating In thisnote, 0e also see that the leasehold im5ro9ements are de5reciated o9er ama6imum term of 1. years inally, any lease inducements are amorti<edo9er the lease term
The 5rimary lease arrangements indicated in the com5anys financialstatements are the o5erating leases for stores, offices, and eFui5mentidentified in 7ote 1-, OCommitments and ContingenciesP The o5eratingleases e65ire (et0een ".1" and "."1 and are su(;ect to rene0al terms insome cases although the term and amounts are not disclosedG There are
also contingent rents (ased on sales as 5art of some of these o5eratingleases
As disclosed in 7ote 1#, the com5any has finance lease o(ligationsoutstanding of D"" million at March #1, ".1" 0hich are included in longterm de(t or the ca5ital leases related to eFui5ment, 7ote , O3ro5erty,3lant and EFui5mentP discloses that the gross carrying amount andaccumulated de5reciation to date for this leased eFui5ment is D,1$thousands and D#,-#" thousands, res5ecti9ely for a net (alance of D","1$thousands This eFui5ment is de5reciated o9er # to ) years see 7ote $G
or the o5erating leases, the only amounts on Indigos (alance sheet 0ould(e 5re5aid or accrued lease 5ayments, 0hich are not se5arately identified8n the income statement, the annual lease 5ayments 0ould (e included inthe Oo5erating and administrati9e e65ensesP line or the ca5ital leases,eFui5ment under ca5ital leases at an amount of D","1$ thousands isincluded in the 5ro5erty, 5lant and eFui5ment line of the financialstatements net of accumulated amorti<ationG There is an offsetting amountof D11 million (eing sho0n as current 5ortion of long4term de(t, and D11million (eing sho0n as 5art of the non4current 5ortion of long4term de(t
8n the consolidated statement of earnings, net earnings disclosed are
5resuma(ly after a charge for lease e65ense for the o5erating leases, andde5reciation e65ense and interest e65ense on the ca5ital leases
A 3ro5erty, 5lant and eFui5ment D +,$$? Total Assets )-",)#C Total %ia(ilities "#,-.$/ Total EFuity #)),#"E !e9enues -##,--. 7et earnings ,1-1 /e(t=EFuity ratio C=/G .+" Ca5ital asset turno9er ratio E=AG 1# # Total asset turno9er ratio E=?G 1)$ !eturn on assets =?G 11"B
cG To ado5t the contract (ased a55roach, the follo0ing ad;ustments arereFuired&
1 Ca5ital leases @ Nnder the contract (ased a55roach, one of thedifferences in this analysis 0ould (e if there 0ere contingent rents to (e5aid 2ince the notes make no mention of this 0ith res5ect to the ca5italleases, 0e can assume that there are none %eased assets set u5 under the e6isting standard 0ould likely continue to (e set u5 as leased assetsand classified are 5art of 5ro5erty, 5lant and eFui5ment 33EG The onlyother ad;ustment 0ould (e that for additional leased assets that 0ere not5re9iously reFuired to (e ca5itali<ed, a right4of4use asset 0ould (eincluded as 5art of intangi(le assets There are no ad;ustments reFuiredon the income statement 5ro9ided 0e assume that the amorti<ation of the intangi(le asset 0ould (e consistent 0ith the de5reciation of theeFui5ment, 0hich is likely the case
" To ca5itali<e the o5erating lease commitments, one needs the follo0ing&aG The amount and timing of the annual 5ayments and the effecti9e interest
rate for ca5itali<ation for the o5ening (alance and the closing (alance of the o(ligation&
Assuming an interest rate of B, and using the minimum o5erating lease5ayment amounts disclosed in 7ote 1#, an estimate of the ca5itali<ed 9alue is5ro9ided (elo0 for the ".1" fiscal year Although there are contingent rents,0ithout some information on these amounts, the 9alue of these ha9e not (eenincluded in the 5resent 9alue of the o(ligation urthermore, although 0e kno0that some of the leases ha9e rene0al 5eriods, 0ithout adeFuate information, 0e0ere una(le to include these in the follo0ing calculations ConseFuently, 0eha9e assumed no rene0al 5eriods and no contingent rents
We ha9e assumed that the lease term is years (ased on the forecasted cashflo0sG and therefore the intangi(le right of use 0ill (e amorti<ed o9er the
remaining lease term of years
(millio"s of <)
year3ost4".1"5ayments
5resent9alueS B
".1# D)) D))"".1$ $$ $1#".1) #1. ".".1 "". 1+$
".1+ 1). 11"".1H "" 11
Total D1-)+ D1+"
?ased on the a(o9e information, the ne6t ste5 is to calculate the im5lied interestcharge for the year& 1+" B 1.. million
Amorti<ation of the intangi(le asset for the ".1" fiscal year 44 assuming that thene0 leases arose half 0ay through the year, the amorti<ation on the intangi(leasset is assumed to (e& 1+"= G "+- million 7et (ook 9alue of intangi(leassets at ".1" 0ould (e& 1+" 4 "+- 1#-#
Impc! o" "e! er"i"#s 1ill be Add (ack lease 5ayment H ))/educt Amorti<ation on ne0 intangi(le assets 4 "+-/educt Interest on lease o(ligation 4 1..7et change H".
aG The terms and conditions associated 0ith the lease of a 9ehicle include&1 %ease costs 0hich include
aG leased 9ehicle 5rice, 0hich include 5rice of accessories,
dealer installed o5tions, freight and 5re4deli9ery ins5ection,and all a55lica(le ta6es such as federal air conditioning ta6,5ro9incial gas consum5tion ta6, tire ta6, etc, (ut e6cludes2T=2T and 32T'
(G o5tional e6tended 0arranty'cG o5tional life insurance'dG o5tional disa(ility insurance'eG other s5ecifyG'fG less cash do0n 5ayment'gG less trade4in allo0ance net of amount o0ing on trade4inG'
and
hG less end 9alue of 9ehicle, to arri9e at the amount to (eamorti<ed 2ee item (elo0G
" Total lease charges, re5resenting interest, and annual lease rate,stated as a 5ercentage the latter (eing 5ro9ided in the ma;ority of casesG
# The lease term, e65ressed in the num(er of months
$ Amount of monthly 5ayments annuity dueG including&aG num(er of monthly 5ayments,
(G (ase monthly 5ayment,cG 5lus 2T or 2T,dG 5lus 32T 0here a55lica(leG, to arri9e at the total monthly
5ayment
) Total of monthly 5ayments arri9ed at (y multi5lying the monthly5ayment (y the num(er of monthly 5ayments
2ummary of amounts due on deli9ery including&aG net cash do0n 5ayment,(G net trade4in allo0ance,
cG 2T, 32T or 2TdG 9ehicle licence fee,eG registration fee,fG other s5ecifiedG,gG first monthly 5ayment, andhG refunda(le security de5osit
+ 25ecification concerning the kilometre charge for kilometres dri9en(eyond a set limit negotiated and s5ecified in the lease to fit the
customers 5articular needs
%ease end 5urchase (ased on the estimated fair market 9alue of the 9ehicle at the end of the term of the lease This o5tion 5rice0ould ha9e 2T or 2T and 32TG added as 0ell as licence fee,registration fee, and charges related to certification of the 9ehicle
- 8ther conditions of the lease include&aG insurance'(G maintenance re5airs and o5erating e65enses'cG ta6es, registration and other charges'
dG e6cess 0ear clauses'eG fines, liens and encum(rances'fG early termination clauses'gG defaults'hG 0arranties'iG guarantees' and
;G clauses concerning modification or relocation of the 9ehicle
(G The cash flo0s associated 0ith the lease include the amounts s5ecifiedunder the amounts due on deli9ery of the 9ehicle item of 5art aGa(o9eG' the monthly 5ayments under the lease, as calculated a(o9e' and
the Olease end 5urchaseP descri(ed in item a(o9eG, should the lesseechoose the o5tion 5rice at the end of the term of the lease, to 5urchasethe 9ehicle
cG The 5urchase o5tion is often the (etter choice In the car lease, all of therisks associated 0ith o0nershi5 are 5assed on to the lessee The amount5ro9ided as the o5tion 5rice to 5urchase the 9ehicle at the end of the termof the lease is a conser9ati9e amount arri9ed at (y the lessor to reducethe risk to them from the reali<ation of the 9alue of the 9ehicle throughresale or through an additional lease transaction, should the o5tion to5urchase not (e e6ercised
