Leases
SFAS 13, November 1976
“Accounting for Leases”
“Accounting for Leases”
Sale-Leaseback
1. Entity A sell a property to Entity B
2. Entity B leases the property to Entity A
3. Entity A is the seller-lessee
4. Entity B is the purchaser-lessor
2. Entity B leases the property to Entity A
3. Entity A is the seller-lessee
4. Entity B is the purchaser-lessor
Classification of sale-leaseback by seller-lessee
1. Sale-capital-leaseback
2. Sale-operating-leaseback
2. Sale-operating-leaseback
Classification of sale-leaseback by purchaser-lessor
1. Purchase-direct-financing-leaseback
2. Purchase-operating-leaseback
2. Purchase-operating-leaseback
Sale-capital-leaseback
1. The lease meets one of (A), (B), (C), (D)
2. A gain or loss on the sale of property is deferred
3. Deferred gain or loss on the sale of property is amortized
–> in proportion to the amortization of the leased asset
2. A gain or loss on the sale of property is deferred
3. Deferred gain or loss on the sale of property is amortized
–> in proportion to the amortization of the leased asset
Sale-operating-leaseback
1. The lease does not meets any of (A), (B), (C), (D)
2. A gain or loss on the sale of property is deferred
3. Deferred gain or loss on the sale of property is amortized
–> in proportion to the rent expense charged over the lease term
2. A gain or loss on the sale of property is deferred
3. Deferred gain or loss on the sale of property is amortized
–> in proportion to the rent expense charged over the lease term
Purchase-direct-financing-leaseback
1. The lease meets one of (A), (B), (C), (D) and both of (E), (F)
2. Record the purchase of property
3. Apply the accounting for a direct financing lease
2. Record the purchase of property
3. Apply the accounting for a direct financing lease
Purchase-operating-leaseback
1. The lease does not meet the requirement for a direct financing lease
2. Record the purchase of property
3. Apply the accounting for an operating lease
2. Record the purchase of property
3. Apply the accounting for an operating lease
Exceptions
Case 1. The seller-lessee leases only a minor portion
–> of the remaining use of the property
–> of the remaining use of the property
Case 2. The seller-lessee retains
–> more than a minor portion
–> but less than substantially all
–> of the remaining use of the property
and
–> gain on the sale > (2a) or (2b)
(2a) recorded amount of leased asset
(2b) present value of minimum lease payments
–> more than a minor portion
–> but less than substantially all
–> of the remaining use of the property
and
–> gain on the sale > (2a) or (2b)
(2a) recorded amount of leased asset
(2b) present value of minimum lease payments
Case 3. Fair value of the property < undepreciated cost
Case 1
The sale and the leaseback are recorded
–> as “separate” transactions
–> as “separate” transactions
Case 2
1. Sale-capital-leaseback
–> Gain on the sale – (2a) is
–> recognized at the time of sale
–> Gain on the sale – (2a) is
–> recognized at the time of sale
2. Sale-operating-leaseback
–> Gain on the sale – (2b) is
–> recognized at the time of sale
–> Gain on the sale – (2b) is
–> recognized at the time of sale
Case 3
A loss is recognized at the time of sale
–> up to the amount of (3a)
(3a) = undepreciated cost – fair value
–> up to the amount of (3a)
(3a) = undepreciated cost – fair value
Capital lease criteria
(A) Ownership transfer
–> Ownership is transferred by the end of the lease term
(B) Bargain purchase option
-> Lessee has an option purchase at the price lower than the fair value
(C) Lease term: 75% rule
–> Lease term ≥ 75% of economic life of the lease property
(D) Minimum lease payment: 90% rule
–> Present value of minimum lease payments > 90% of fair value of the lease property
–> Ownership is transferred by the end of the lease term
(B) Bargain purchase option
-> Lessee has an option purchase at the price lower than the fair value
(C) Lease term: 75% rule
–> Lease term ≥ 75% of economic life of the lease property
(D) Minimum lease payment: 90% rule
–> Present value of minimum lease payments > 90% of fair value of the lease property
Additional criteria for lessor
(E) Collectibility of minimum lease payment
–> reasonably predictable
(F) No important uncertainties
–> about the additional costs to be incurred by lessor
–> when such costs are not reimbursable
–> reasonably predictable
(F) No important uncertainties
–> about the additional costs to be incurred by lessor
–> when such costs are not reimbursable