Study Guides (380,000)
CA (150,000)
York (10,000)
ACTG (100)
Final

ACTG 3120 Study Guide - Final Guide: Longrun, Management Accounting, Issued Shares


Department
Accounting
Course Code
ACTG 3120
Professor
Elizabeth Farrell
Study Guide
Final

This preview shows pages 1-2. to view the full 8 pages of the document.
Chapter 18: Leases
Finance Lease Criteria – if does not meet one of the criteria, it’s an operating lease
Reasonable certainty that the lessee will obtain ownership at the end of the lease term
Does the lease term cover most of the asset’s useful life
oIFRS: “most”
oASPE: more than 75%
Does the PV of the lease payments equal most of the value of the asset?
oIFRS: “most”q
ASPE: more than 90%
Is the asset highly specialized?
Was there evidence of a bargain purchase
Other conditions:
oLosses from the cancellation of lease are borne by the lessee
oGains and losses from changes in value accrue to the lessee
Lessee is able to extend the lease for another
Operating Lease
Lessee Lessor
Show the lease expense every period Would be included under rent revenue or other
revenue. The asset will appear as “asset available
for lease” and will depreciate over useful life.
Executory Cost – specified costs relating to the lease
Lessee – include as a part of rent expense
Lessor – credited to a contra account to offset the costs incurred
Uneven Payments
If the lessee is required to make a lump sum payment at the beginning of the lease period, it must be amortized over
the period of the initial lease term
If lease payments do not begin until after a period of time, then the forgiven payments are amortized by charging the
lease payments to expense, and amortizing the forgiven amounts over the full lease term
oLessee records a deferred rent liability, and rent expense for the effective rental rate and amortizes over the
remaining life.
*Remember to check when the payment is due (beginning vs. end), changes which PV table you use
Benefits of Off B/S Financing (for operating leases)
Allows lessee to make full use of assets without recording it
Lowers debt-to-equity ratio and helps avoid violating covenants
Definitions:
Lease Term: includes all terms prior to the exercise date of BPO, bargain renewal term (extend lease payments less
than market), and all renewal terms at the lessor’s option
Minimum net lease payments – all payments that the lessee is required to make over the lease term less any
operating or executory costs plus any guaranteed residual value but does not include contingency lease payments
(based on subsequent events)
Interest rate for Discounting – lessor’s rate is implicit OR the lessee’s incremental borrowing rate
FV Ceiling – in no case should an asset be recorded at higher than fair value. Must calculate the borrowing rate so
that the PV of the lease payments are equal to the current fair value
Finance Leases
Lessee Lessor
Record the PV of the lease payments under
an asset under a finance lease, and a credit
for the lease liability.
Set up an amortization table that calculates
find more resources at oneclass.com
find more resources at oneclass.com

Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

interest, so you dr. interest expense, and cr.
lease liability at year end
Impact on the F/S
SFP – lease will be separated into current and LT liability. Asset under lease + accum dep
SCI – will show amortization and interest expense
SCF – lease payments will be included under CFF for the principle (payment less interest)
Disclosure –
Payment END Year Lessor
1) Initial Entry
2) Accrue interest
3) Amortize Asset
4) Recognize Payments
1) Initial Entry
2) Recognize Payments
3) Accrue Interest
4) Amortize Asset
Other complications:
Interest Expense – may not coincide with lease term; accrue interest at the end of the year, and credit it to lease
liability.
Guaranteed Residual Value – if lessor sells asset at end of lease for less than the guaranteed residual value, lessee
recognizes a loss in the difference (dr. loss, cr. cash)
Sale Leaseback – the owner of an asset sells it to another party and leases it back
Immediate cash inflow and can create a gain or a loss
Steps to a Sale Leaseback:
Lease for Land and building – allocate minimum lease payments based on the relative fair values of the each asset’s
benefits
Finance Lease Operating Lease
Gain/Loss on Sale Any gain or loss is deferred and amortized
over the lease term
Sale Price = FV – recognize gain or loss
immediately
Sale Price > FV – excess over FV is deferred and
amortized over the lease term
Sale Price < FV – recognize any gain or loss
immediately unless the lease payments are less
than market lease terms, then it is deferred and
amortized over the lease term
How to Record Sale - Dr. Cash & Accum Dep, Cr. Building
and deferred gain
Lease – find PV of lease. Dr. Building, Cr.
Lease Liability
Gain is credited to the depreciation expense
Record the expense as incurred
Lessee Disclosure
Operating Lease: general descriptions, minimum lease payments, contingent rents, disclose company’s obligation for
operating lease payments
Finance Lease: clarify which assets are under lease, description of the arrangements, amount of contingent rent, each
class of asset, future minimum lease payments and their PV, reconciliation b/w total future lease payments and their
PV
Long Term Leases
Pro Con
Transfer of
Income Tax
Driving force behind a bulk of finance leases.
find more resources at oneclass.com
find more resources at oneclass.com
You're Reading a Preview

Unlock to view full version

Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

Benefits
Off-Sheet
Financing
Operating leases do not show up on the B/S
and will not impact debt to equity
Shorter the lease, the greater the cost and the
increased amount of risk to the lessor. This is
passed back to the lessee in the form of higher
annual lease payments
100% Financing A lease can provide full financing for people
who can get a loan for the full purchase price
of an asset
Only exists for assets that are readily transferable
if the lessee defaults and if the lessee has a high
credt rating
Protection Against
Obsolescence
Shorter the lease term, the easier it is for the
lessee to stay up to date with the latest
technology
Might be charged higher rent payments
Protection Against
Interest Rate
Charges
Protected from fluctuating interest rates But if business fluctuates in response to economic
conditions, may be better to use variable rate
loans
Avoiding Lease Capitalization
Use Contingent Rent
Insert Third Party – form a separate company to lease assets to the operating company
Impose a substantial penalty for non-renewal
Lessor Accounting
Only companies that derive at least 90% of their revenues from leasing are permitted to deduct CCA in excess of
rental revenue
Differences between Lessee’s and Lessor’s net cash flows:
oInitial Cost: lessor may obtain a more favourable price if buying in bulk
oResidual Value: significant
oTax Shield: lessor can gain a significant tax sheld
Sales Type: lessor leases property to lessee from inventory, and is counted as revenue as if the property is sold
New Standard – IFRS 16 (Effective Date: Jan 1 2019)
Eliminates distinction between finance vs. operating leases for lessee
A lease “a contract that conveys to the customer lessee the right to use an asset for a period of time in exchange for
consideration”
oDo they have control?
Option to exclude all leases 12 months or less and excludes leases with values US $5000
Measure at PV of lease payments and exclude variable payments
Not much change for the lessor – costs of changing seen to outweigh benefits
Chapter 19: Post-Employment Benefits
Defined Contribution Plan Defined Benefit Plan
The contributions are fixed, with the benefits variable.
Employee accepts actuarial risk (benefits less than
expected) and investment risk (assets invested will not
completely fund the expected pension)
The eventual benefits are stated in the pensions plan. The
employer takes the actuarial and investment risk
Key Terms
Contributory – employee makes contributions to the plan in addition to those made by the employer
Non-Contributory – pension contributions are made solely by the employer
Vested – a period of time in which employees are entitled to receive the benefits
o10+45 years or in Ontario, after two years
Trustee – independent trustee that receives the pension contributions from the employer and invests the
contributions. In Ontario, vesting after two years
Registered – pension plans normally are registered with the pension commissioner in the province of jurisdiction. If It
is not registered, the employer cannot deduct the pension contributions
find more resources at oneclass.com
find more resources at oneclass.com
You're Reading a Preview

Unlock to view full version