Operating Lease - Lessor

New Standard - business as usual

Classify Lease as either an operating lease or finance lease.

Operating Lease - is a lease that does not transfer substantially all the risks and rewards incidental to ownership of the underly

Finace Lease - is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.

Substance over form

When is a Lease Classified as Finance Lease:

1.
2. Transfer of an
Lessee has ownership
option toofpurchase
the underlying asset
the asset at atoprice
the lessee
which at the end oftothe
is expected belease term. lower than the fair value at the dat
sufficiently
At the inception of the lease it is reasonably certain that the option will be exercised.
3. The lease is for the major part of the econmic life of the underlying asset even if the title is nor transferred
4. The present value of the lease payments amounts to substantially all the fair value of the underlying asset at the inception o

Major part = 75% under US GAAP

Substantiall all = atleast 90% of the FV of leased Asset under US GAAP

Other criteria
1. specialized nature that only the lessee can use it without major modification
2. If the lessee can cancel the lease, the lessor lossses associated with the cancelation are borne by the lessee
3. Gain or loss from the fluctuation in the FV of the residual accrue to the lessee
4. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

Land and building Lease

Land and building consider this two elements separately
Lease payments are allocated in proportion to the relative FV of the leasehold interest in the land and building elements at the
If the lease cannot be allocated reliably, the entire lease is classified as finance lease, unless it is clear that both elements are o
If the amount of land is immaterial to the lease, lessor may treat the land and building as a single unit
The single lease is classified as a finance lease or an operating lease applying the lease classification criteria for lessor

Opertaing Lease - Lessor

periodic renatl received - Rent Income
Underlying Asset - present according to the narure of the asset
Depreciation - consistent with the lessors normal depreciation for similar asset
Initial direct cost - added to the carrying amount of the underllying asset and recognize as an expense over the lease term on t
Security Deposit - accounted as a liability
Lease bonus - unearned rent income to be amortized over the lease term

Unequal rental payments'Lease payments under an operating lease shall be recognized as income on a straight line basis or an
*the total cash pamets for the lease term shall be amortized uniformly on the straight line bases as rent income over the lease
12-1 12-9
Equipment 3,000,000 2020 600,000.00
Cash 3,000,000 2021 900,000.00
 2022 2,100,000.00
Cash 360,000.00 Total lease payment 3,600,000.00
Rental Income 360,000.00 Rental income 1,200,000.00

Cash 120,000 12/31/2020

Unearned rent income 120,000 Cash 600,000.00
Rent Receivable 600,000.00
Repairs and maintenanc 20,000 Rental income
Cash 20,000
12/31/2021
Depreciation Expense 300,000.00 Cash 900,000.00
ADE 300,000.00 Rent Receivable 300,000.00
Rental income
Unearned rental income 30,000.00
Rent Income 30,000.00 12/31/2022
Cash 2,100,000.00
Rent Receivable
Rental income 390,000.00 Rental income
Less:
20,000
300,000.00 320,000
Net Rental Income 70,000.00

Finace Lease - Lessor

Classification of finance lease on the part of the lessor
Income recognized Underlying Asset
1. Direct Financing Lease Recognizes interest income PPE
2. Sales type lease Recognizes interest income and gross profit on sale Inventory

DIRECT FINANCING LEASE

Accounting considerations
1. Gross investment =Lease payments plus absolute amount of RV, either guaranteed or unguaranteed
2. Net investment = Cost of asset plus initial direct cost paid by the lessor
3. Unearned interest income = GI -NI
4. Initial direct cost = added to the cost of the asset which will be amortized over the lease term

13-2

Lease payment 7,200,000.00

Residual value 600,000
Gross investment 7,800,000.00
Cost / Net investment 5,250,000.00

Unearned interset income 2,550,000.00

Date Payment Interest Principal Present Value

1/1/2020 5,250,000.00
1/1/2020 900,000.00 900,000.00 4,350,000.00
1/1/2021 900,000.00 522,000.00 378,000.00 3,972,000.00
1/1/2022 900,000.00 476,640.00 423,360.00 3,548,640.00
1/1/2023 900,000.00 425,836.80 474,163.20 3,074,476.80
1/1/2024 900,000.00 368,937.22 531,062.78 2,543,414.02
1/1/2025 900,000.00 305,209.68 594,790.32 1,948,623.70
1/1/2026 900,000.00 233,834.84 666,165.16 1,282,458.54
1/1/2027 900,000.00 153,895.03 746,104.97 536,353.57
1/1/2028 600,000.00 63,646.44 536,353.56 0.00

1/1/2020
Lease Receivable 7,800,000.00
Equipment 5,250,000.00
Unearned interest income 2,550,000.00

Cash 900,000.00
Lease Receivable 900,000.00

Unearned interest income 522,000.00

Interest income 522,000.00

1/1/2021
Cash 900,000.00
Lease Receivable 900,000.00

Unearned interest income 476,640.00

Interest income 476,640.00
1/1/2027
Cash 900,000.00
Lease Receivable 900,000.00

Unearned interest income 63,646.44

Interest income 63,646.44

1/1/2028 unguaranteed residual value

Equipment 500,000
Loss on finace lease 100,000
Lease Receivable 600,000.00
 Guaranteed residual value
Equipment 500,000
Cash 100,000
Lease Receivable 600,000.00

Reference:
Intermediate Accounting Volume 2, C. Valix and Company, 2020 edition
ownership of the underlying asset.

of an underlying asset.

n the fair value at the date the option becomes exercisable.

g asset at the inception of the lease

lower than market rent.

d building elements at the inception of the lease

that both elements are oeprating lease

riteria for lessor

over the lease term on the same basis as the lease income

a straight line basis or another systematic basis

nt income over the lease term
 1,200,000.00

1,200,000.00

900,000.00
1,200,000.00

rlying Asset

Sales Type Lease

Accounting considerations
1. Gross investment =Lease payments plus absolute amount of RV, either guaranteed or unguaranteed
2. Net investment = PV of lease payments plus PV of residual value, either guaranteed or unguaranteed
3. Unearned interest income = GI -NI
4. Sales = net investment in the lease or FV of the asset, which ever is lower
5. COGS = Cost of asset - (unguaranteed) PV of residual value + IDC
6. Gross profit = Sales -COGS

14-4
Lease payments 15,000,000.00
Residual value guarantee 1,000,000.00
Gross Investment 16,000,000.00
Lease payments 3,000,000.00 3.6 10,800,000.00
Residual value guarantee 1,000,000.00 0.57 570,000.00
Net investment 4,000,000.00 11,370,000.00

Unearned interest income 4,630,000.00

Sales 11,370,000.00
Cost of goods sold
8,000,000
300,000 8,300,000.00
Gross Profit 3,070,000.00

Lease receivable 16,000,000.00 Right of use asset

Unearned interest income 4,630,000.00
Sales 11,370,000.00
Interest Expense
COGS 8,000,000 Lease Liability
Inventory 8,000,000

COGS 300,000
Cash 300,000

Unearned interest income 1,364,400.00

Interest income 1,364,400.00

Cash 3,000,000.00
Lease receivable 3,000,000.00
Right of use asset 11,370,000.00
Lease Liability 11,370,000.00

Interest Expense 1,364,400.00

Lease Liability 1,635,600.00
Cash 3,000,000.00