Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 21 Accounting for Leases Learning Objectives After studying this chapter, you should be able to: Describe the environment related to leasing transactions Explain the accounting for finance leases Explain the accounting for operating leases Discuss the accounting and reporting for special features of lease arrangements Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 21 (1 of 3) Accounting for Leases The Leasing Environment • Lessees • Lessee lease advantages • Lessors • Lessor lease advantages • Conceptual nature of a lease • Finance and operating leases Lease classification Copyright â2019 John Wiley & Sons, Inc Preview of Chapter 21 (2 of 3) Finance Leases • Lessee accounting • Finance lease example • Lessor accounting • Sales-type lease example Operating Leases • Lessee accounting Lessor accounting Copyright â2019 John Wiley & Sons, Inc Preview of Chapter 21 (3 of 3) Special Lease Accounting Problems • Residual values • Other lease adjustments • Bargain purchase options • Short-term leases • Presentation, disclosure, and analysis Copyright ©2019 John Wiley & Sons, Inc Learning Objective Describe the Environment Related to Leasing Transactions LO Copyright ©2019 John Wiley & Sons, Inc The Leasing Environment (1 of 4) A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time Largest group of leased equipment involves: • Information technology equipment • Transportation (trucks, aircraft, rail) • Construction • Agriculture LO Copyright ©2019 John Wiley & Sons, Inc The Leasing Environment (2 of 4) Company (Ticker) Gap (GPS) ExxonMobil Corp (XOM) JPMorgan Chase (JPM) Maytag Corp (MYG) LO Description "We lease most of our store premises and some of our headquarters facilities and distribution centers." "Minimum commitments for operating leases, shown on an undiscounted basis, cover drilling equipment, tankers, service stations, and other properties." "JPMorgan Chase and its subsidiaries were obligated under a number of noncancelable operating leases for premises and equipment used primarily for banking purposes." "The Company leases real estate, machinery, equipment, and automobiles under operating leases, some of which have renewal options." Copyright ©2019 John Wiley & Sons, Inc The Leasing Environment (3 of 4) Company (Ticker) McDonald's Corp (MCD) Starbucks Corp (SBUX) TXU Corp (TXU) LO Description "The Company was the lessee at 15,235 restaurant locations through ground leases (the Company leases the land and the Company or franchisee owns the building) and through improved leases (the Company leases land and buildings)." "Starbucks leases retail stores, roasting and distribution facilities, and office space under operating leases." "TXU Energy Holdings and TXU Electric Delivery have entered into operating leases covering various facilities and properties including generation plant facilities, combustion turbines, transportation equipment, mining equipment, data processing equipment, and office space." Copyright ©2019 John Wiley & Sons, Inc The Leasing Environment (4 of 4) Company (Ticker) Viacom Inc (VIA.B) Blank LO Description "The Company has long-term non-cancelable operating lease commitments for office space and equipment, transponders, studio facilities, and vehicles The Company also enters into capital leases for satellite transponders." Source: Company 10-K filings Copyright ©2019 John Wiley & Sons, Inc 10 Comprehensive Example (Lease Terms: Scenario 2) (7 of 8) Lessee operating lease entries (continued) LO Copyright ©2019 John Wiley & Sons, Inc 142 Comprehensive Example (Lease Terms: Scenario 2) (8 of 8) Lessor Accounting – Operating Lease LO Copyright ©2019 John Wiley & Sons, Inc 143 Learning Objective Compare the Accounting for Leases Under GAAP and IFRS LO Copyright ©2019 John Wiley & Sons, Inc 144 IFRS Insights (1 of 11) Relevant Facts Similarities • Both GAAP and IFRS share the same objective of recording leases by lessees and lessors according to their economic substance—that is, according to the definitions of assets and liabilities • Much of the terminology for lease accounting in I FRS and GAAP is the same • Both GAAP and IFRS require lessees to recognize a right-of-use asset and related lease liability for leases with terms longer than one year • Under both IFRS and GAAP, lessors use the same general criteria (consistent with the recent standard on revenue) to determine if there is transfer of control of the underlying asset and if lessors classify leases as sales-type or operating LO Copyright ©2019 John Wiley & Sons, Inc 145 IFRS Insights (2 of 11) Relevant Facts Similarities • GAAP and IFRS have similar qualitative and quantitative disclosure requirements for lessees LO Copyright ©2019 John Wiley & Sons, Inc 146 IFRS Insights (3 of 11) Relevant Facts Differences • There is no classification test for lessees under I FRS 16 Thus, lessees account for all leases using the finance lease method—that is, leases classified as operating leases under GAAP will be accounted for differently compared to I F RS (see example in About the Numbers section below) • IFRS allows alternative measurement bases for the right-of-use asset (e.g., the revaluation model, in accordance with I AS 16, Property, Plant and Equipment) • In addition to the short-term lease exception, I FRS has an additional lessee recognition and measurement exemption for leases of assets of low value (e.g., personal computers, small office furniture) LO Copyright ©2019 John Wiley & Sons, Inc 147 IFRS Insights (4 of 11) Relevant Facts Differences • IFRS does not include any explicit guidance on collectibility of the lease payments by lessors and amounts necessary to satisfy a residual value guarantee • IFRS does not distinguish between sales-type and direct financing leases for lessors Therefore, IFRS 16 permits recognition of selling profit on direct financing leases at lease commencement • IFRS applies to leases of any asset, whether tangible plant, property, or intangible assets GAAP applies only to tangible plant property • IFRS uses the same model for leases for both lessees and lessors, whereas GAAP uses a different model for lessees and lessors LO Copyright ©2019 John Wiley & Sons, Inc 148 IFRS Insights (5 of 11) On The Horizon Lease accounting is one of the areas identified in the IASB/FASB Memorandum of Understanding The Boards have developed rules based on “right-of-use” (ROU) which require that all leases with terms longer than one year be recorded on the statement of financial position/balance sheet The IASB has decided on a single approach for lessee accounting Under the IASB approach, a lessee accounts for all leases as finance leases, recognizing depreciation of the ROU asset separately from interest on the lease liability The FASB reached a different conclusion on the expense recognition for operating-type leases Under the F ASB model, the income effects will reflect a straight-line expense pattern, reported as a single total lease expense The Boards are generally converged with respect to lessor accounting LO Copyright ©2019 John Wiley & Sons, Inc 149 IFRS Insights (6 of 11) IFRS Self-Test Questions Which of the following is false with respect to lease accounting under IFRS? a IFRS require lessees to recognize a right-of-use asset and related lease liability for leases with terms longer than one year b IFRS does not include any explicit guidance on collectibility of the lease payments by lessors and amounts necessary to satisfy a residual value guarantee c IFRS does not permit recognition of selling profit on direct financing leases at lease commencement d IFRS uses essentially the same lessor accounting model as GAAP for leases classified as sales-type or operating LO Copyright ©2019 John Wiley & Sons, Inc 150 IFRS Insights (7 of 11) IFRS Self-Test Questions Which of the following is not true with respect to lease accounting under IFRS? a IFRS require lessees to recognize a right-of-use asset and related lease liability for leases with terms longer than one year b IFRS does not include any explicit guidance on collectibility of the lease payments by lessors and amounts necessary to satisfy a residual value guarantee c IFRS does not permit recognition of selling profit on direct financing leases at lease commencement d IFRS uses essentially the same lessor accounting model as GAAP for leases classified as sales-type or operating LO Copyright ©2019 John Wiley & Sons, Inc 151 IFRS Insights (8 of 11) IFRS Self-Test Questions Under IFRS: a lessees and lessors recognize right-of-use assets b lessees always use the operating method c lessees always recognize a right-of-use asset and lease liability for leases with terms less than one year d lessors not distinguish between sales-type and direct financing leases LO Copyright ©2019 John Wiley & Sons, Inc 152 IFRS Insights (9 of 11) IFRS Self-Test Questions Under IFRS: a lessees and lessors recognize right-of-use assets b lessees always use the operating method c lessees always recognize a right-of-use asset and lease liability for leases with terms less than one year d lessors not distinguish between sales-type and direct financing leases LO Copyright ©2019 John Wiley & Sons, Inc 153 IFRS Insights (10 of 11) IFRS Self-Test Questions All of the following are differences with respect to the accounting for leases, under IFRS and GAAP, except: a IFRS has an additional lessee recognition and measurement exemption for leases of assets of low value (GAAP does not) b IFRS allows alternative measurement bases for the right-ofuse asset (e.g., the revaluation model) c under IFRS, lessees use the same tests to determine if a lease should be classified as finance or operating d IFRS permits recognition of selling profit on direct financing leases at lease commencement LO Copyright ©2019 John Wiley & Sons, Inc 154 IFRS Insights (11 of 11) IFRS Self-Test Questions a.All of the following are differences with respect to the accounting for leases, under IFRS and GAAP, except: a IFRS has an additional lessee recognition and measurement exemption for leases of assets of low value (GAAP does not) b IFRS allows alternative measurement bases for the right-ofuse asset (e.g., the revaluation model) c under IFRS, lessees use the same tests to determine if a lease should be classified as finance or operating d IFRS permits recognition of selling profit on direct financing leases at lease commencement LO Copyright ©2019 John Wiley & Sons, Inc 155 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Copyright ©2019 John Wiley & Sons, Inc 156 ... (2 of 3) Finance Leases • Lessee accounting • Finance lease example • Lessor accounting • Sales-type lease example Operating Leases • Lessee accounting • Lessor accounting Copyright ©2019 John... Explain the Accounting for Finance Leases LO Copyright ©2019 John Wiley & Sons, Inc 28 Accounting for Finance Leases Illustration Lessee Accounting for Finance Leases To illustrate the accounting. .. environment related to leasing transactions Explain the accounting for finance leases Explain the accounting for operating leases Discuss the accounting and reporting for special features of lease