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UNC2020.FINNAC 2.MODULE 1 LEASES Part 2

This document discusses lease accounting from the perspective of both lessees and lessors. For lessees, lease liability is measured as the present value of lease payments using the implicit interest rate. The right of use asset equals the lease liability plus initial direct costs and less any lease incentives. Executory costs are expensed outright. For lessors, a direct finance lease results in interest income recognition, while a sales-type lease results in profit recognition from the sale as well as interest income over time. Computation of sales and cost of sales depends on whether the residual value is guaranteed or unguaranteed.

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37 views

UNC2020.FINNAC 2.MODULE 1 LEASES Part 2

This document discusses lease accounting from the perspective of both lessees and lessors. For lessees, lease liability is measured as the present value of lease payments using the implicit interest rate. The right of use asset equals the lease liability plus initial direct costs and less any lease incentives. Executory costs are expensed outright. For lessors, a direct finance lease results in interest income recognition, while a sales-type lease results in profit recognition from the sale as well as interest income over time. Computation of sales and cost of sales depends on whether the residual value is guaranteed or unguaranteed.

Uploaded by

Airon Bendaña
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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UNC SY 2020

MODULE 1: LEASE ACCOUNTING

LESSEE'S point of view LESSOR'S point of view


LEASE LIABILITY IS MEASURED THRU THE PRESENT VALUE OF LEASE PAYMENTS USING IMPLICIT RATE. TRANSFER OF TITLE - IF THE PPE IS NOT REVERTED/RETURNED TO THE LESSOR AT THE END
Computation of lease liability varies if the following events/agreements is present: OF THE LEASE TERM THE RESIDUAL VALUE WHETHER GUARANTEED OR UNGUARANTEED IS IGNORED
1. CERTAIN PURCHASE OPTION - included in the PV computation IN THE COMPUTATION OF ANNUAL RENTAL AND UNEARNED INTEREST INCOME
2. RESIDUAL VALUE GUARANTEE - included in the PV computation
3. UNGUARANTEED RESIDUAL VALUE -value ignored DIRECT FINANCE LEASE - LESSOR RECOGNIZE ONLY AN INTEREST INCOME ASIDE FROM THE ANNUAL RENT

RIGHT OF USE IS LEASE LIABILITY PLUS ANY OF THE FOLLOWING (which does not affect the lease liability): RETURN OF EQUIPMENT - THE PRESENT VALUE OF THE RESIDUAL VALUE IS DEDUCTED FROM THE
1. INITIAL DIRECT COST - added in the right of use of asset COST OF THE MACHINERY
2. LEASE INCENTIVE -deducted in the right of use of asset
SALES TYPE LEASE - LEASE MEANS FACILITATING THE SALE OF THE PRODUCT
EXECUTORY COST IS EXPENSE OUTRIGHT THUS, LESSOR RECOGNIZE PROFIT FROM THE LEASE ASIDE FROM THE INTEREST INCOME

DEPRECIABLE VALUE IS AFFECTED BY RESIDUAL VALUE OF THE ASSET Computation of Sales and Cost of Sales the following is to be considered:
1. RESIDUAL VALUE GUARANTEED - PV of the residual value is included in sales
2. UNGUARANTEED RESIDUAL VALUE - PV of the residual value is included is ignored in sales
*FOOTNOTES: but deducted in the computation of cost of sales
Right to control means that the lessee has a substantial benefit from the asset either directly or indirectly
SHORTERM - means the lease term is 12 months and below INITIAL DIRECT COST - is charged against cost of goods sold thus, reducing gross income
LOW VALUE - value is based on professional judgement
FINANCE LEASE -means the lease contract transfers substantially all of the risk and rewards incidental to ownership of the asset.

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