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20-Leases - Chapter 20 Note:Financial calculatorrequired...

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    Chapter 20 Chapter 20         Leases Leases Note: Financial  calculator required Only TI BA II  Plus supported  in class
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2 Leases Leasing Basics •The leasing environment •Conceptual nature of a lease •Current standards Classification Approach – Lessors •Classification criteria •Accounting for financing and sales-type leases •Accounting for an operating lease •Initial direct cost •Lessor disclosures •Time for change Classification Approach – Lessees •Classification criteria •How the lessor determines the rental payment •Accounting for a capital lease •Accounting for an operating lease •Capital and operating leases compared •Presentation and disclosure Contract-Based Approach •Scope and definition •Recognition and measurement – lessee •Illustration •Recognition and measurement basics – lessor •New lease accounting standard IFRS / Private Enterprise GAAP Comparison •Comparison of IFRS and private enterprise GAAP •Looking ahead
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3 Leasing: Basics Leasing: Basics The lease is a contractual agreement between the lessor and the lessee The lease gives the lessee the right to use specific property (owned by the lessor) The lease specifies also the duration of the lease and rental payments The obligations for taxes, insurance, and maintenance (executory costs) may be assumed by the lessor or the lessee or divided
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4 Advantages of Leasing Advantages of Leasing 100 percent financing at a fixed rate No down payment required Rate charged is fixed for the term of the lease Protection from obsolescence Property can be upgraded Flexibility Lease may be structured to meet different needs (e.g., cash flow) Less costly financing (lessee); tax incentives (lessor) Off-balance sheet financing Impact on ratios
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5 Leasing Leasing But is a lease simply renting or is it more?
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6 Lease example: Lease example: The tale of two companies The tale of two companies Company A: - Purchased a jet for 6 million dollars by taking out debt in this amount. - Debt payments are1. 5 million dollars a year for 5 years (Includes interest) Company B: - Leased a jet. - Lease payments are 1.5 millions dollars a year for 5 years. - At the end of the lease, ownership of the jet will transfer to Company B. - The lease payments are binding. Company A Balance Sheet Assets: Cash $1,000,000 Jet 6,000,000 $7,000,000 Liabs & SH’s E Debt $6,000,000 Equity 1,000,000 $7,000,000 Company B Balance Sheet Assets: Cash $1,000,000 $1,000,000 Liabs & SH’s E Equity 1,000,000 $1,000,000
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7 Conceptual Nature of Lease Conceptual Nature of Lease 1. Do not capitalize any leased assets – an executory contract approach Since lessee does not own the property, capitalization is considered inappropriate Since executory contracts are not capitalized, leases should not be either 1. Capitalize leases that are similar to instalment purchases – a classification approach if instalment purchases are capitalized, so should leases with similar characteristics 1. Capitalize all long-term leases – a contract-based
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