Lease Presentation
Transcript: Martin Inc. can either use the incremental monthly borrowing rate of .447% or the implicit monthly interest rate of .46%. Which one is the appropriate one to use? GAAP states that if the implicit rate is known, to use the lower rate of the two. So under GAAP, Martin would use the .447% rate. IFRS wants the the implicit rate to be used if it is known. So under IFRS, Martin, Inc. would use the .46% rate. What rate should Martin, Inc. use to find the present value (PV) of minimum lease payments? What is the PV of minimum lease payments? Would this lease be an operating lease or capital lease? What journal entries are necessary on the commencement date of the lease? What balance sheet accounts will be affected at year end? What changes are coming with the new lease standards? ASC 840-10-25-31 IAS 17:20 $1.25 Friday, April 22, 2016 GAAP IFRS Reduction of $87,549 in the Lease Asset account IAS 17:27 Reduction of $75,027 in the Lease Liability account IAS 17:25 Reduction of cash in the amount of $108,000 What changes are coming with the new lease standards issued by FASB and IFRS? Martin, Inc. 1) Is there a transfer of ownerships? NO 2) Is there a bargain purchase that is "significantly" lower than fair value? NO 3) Is the lease term for a "major part of the economic life"? NO 4) Are the PV of the lease payments "at least substantially all of the fair value of the underlying asset"? 88% YES (per our professional judgment) 5) The asset is such that the only the lessee can use it without substantial modification. NO Kristen Hartman-Bueche & Sara Sharpe GAAP: ASC 840-20-25-1 requires the following entry: Machine Rent Expense 12,000 Cash 12,000 IFRS: IAS 17:20 and 17:25 require the following entries: Leased Equipment 934,000 Lease Liability 934,000 Lease Liability 12,000 Cash 12,000 IFRS Questions? Vol XCIII, No. 311 GAAP Martin's cash would have decreased by $108,000 because of this lease. They must disclose future minimum rental payments as of the date of the latest balance sheet. ASC 840-20-50-2 ASC 842-10-65-1 IFRS 16 GAAP & IFRS What Constitutes a Capital Lease? 1) Is there a transfer of ownership? NO 2) Is there a Bargain Purchase Option? NO We have exercised our judgment and decided this does not constitute a bargain purchase. 3) Is the lease term equal to or more than 75% of the estimated economic life? 8/11=72.7% NO 4) Does the PV of minimum lease payments equal of exceed 90% of the FV at inception? $939,200<$945,000 NO ASC 840-10-25-1 This makes the PV of minimum lease payments $939,200 under GAAP and $933,863 under IFRS! US GAAP (a) Transfer of ownership (b) Bargain purchase option (c) Lease term equal to 75% or more of estimated economic life of the leased property (d) PV of the minimum lease payments, is equal or greater than 90% of the excess of the fair value of the leased property at the lease inception. (ASC 840-10-25-1) Key Facts in the Case Lease term 8 years, economic life 11 years Purchase option exercise price of 17% fair value (FV) at inception FV at inception is $1.05 million Monthly payments of $12,000 Residual value is expected to be 20% of FV at date of inception Incremental monthly borrowing rate is .447% Implicit interest rate is .46% Journal Entries at Lease Inception Date IMPLICIT INTEREST RATE VS. INCREMENTAL BORROWING RATE ASC 840-10-25-30 Which rate to use when finding the PV of minimum lease payments OPERATING LEASE How to Account for Leases IFRS (a) Transfer of ownership (b) Bargain purchase option “sufficiently lower than fair value” (c) Lease term is for the “major part of the economic life of the underlying asset” (d) PV of the lease payments amounts to “at least substantially all of the fair value of the underlying asset” at the inception date,and (e) the asset is such that only the lessee can use it without substantial modification (IAS 17:10) ALL THINGS ACCOUNTING CAPITAL LEASE Balance Sheet Effects at Year End