Back from the new owner any gain on the sale of the

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Unformatted text preview: is deferred and amortized. amortized. A real loss on the sale of the property is recognized A real loss on the sale of the property is recognized immediately. immediately. 15-53 Slide 54 Sale-Leaseback Arrangement - Example Teledyne Distribution Center was in need of cash. Its solution: sell its four warehouses for $900,000, then lease back the warehouses to obtain their continued use. The warehouses had a carrying value on Teledyne's books of $600,000 (original cost $950,000). Other information: 1.The sale date is December 31, 2011. 2.The noncancelable lease term is 10 years and requires annual payments of $133,155 beginning December 31, 2011. The estimated remaining useful life of the warehouses is 10 years. 3.The annual rental payments (present value $900,000) provides the lessor with a 10% rate of return on the financing arrangement. Teledyne's incremental borrowing rate is 10%. 4.Teledyne depreciates its warehouses on a straight-line basis. 15-54 Slide 55 Sale-Leaseback Arrangement - Example Lessee (seller) prepares following entries: Lessor (buyer) records the lease in accordance Lessor with the usual lease guidelines. with 15-55 Slide 56 U. S. GAAP vs. IFRS Lease accounting under U.S. GAAP and IFRS provides a good general comparison of “rules-based accounting” as U.S. GAAP often is described and “principles-based accounting” which often is the description assigned to IFRS. • Lease classification rules. • Situations that normally would lead to classification as a capital lease are: 1. Same as IFRS. 2. 75% or more of assets life. 1. Contains a BPO 3. “Substantially all means 90% or more. 2. Term is “major portion” of asset’s life. 4. Title transfers. 3. PV of MLP greater than “substantially all” of the fair value of the asset. 4. Other circumstances impact classification. 15-56 Slide 57 Joint Project of FASB and IASB The FASB and the IASB initiated a joint project to develop a new approach to lease accounting that would ensure that assets and liabilities arising under leases are recognized in the statement of financial position. Proposed new model: ◦ Based on the idea that an asset = the right to use a leased asset ◦ “Right-to-use” model All leases should be capitalized. 15-57...
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