Tip: To be technically correct, leasing liability must be divided between long-term and current liability. Example 1 – Lease Delay Processing On April 1, 2009, Bush Co. entered into an agreement to lease a machine with an estimated lifespan of four years. The term of the lease is also four years and the asset is then returned to the leasing company. Annual rents of $5,000 are late as of March 31, 2010. The machine is expected to have zero residual value at the end of its life. The machine had a fair value of $14,275 at the beginning of the lease. In calculating annual rents, the landlord includes a financing cost of 15% per year. How will the lease be recorded in Bush`s annual accounts for the March 31, 2010 fines? Solution The lease agreement should be considered a financing lease, as the estimated life of the asset is four years and Bush retains the right to use the asset for four years in accordance with the lease and thus benefit from the asset rewards. any sale and leasing transaction that results in a financing lease is put in place of a possible surplus of book value and depreciated over the life of the lease.
[IAS 17.59] While this is not within the scope of this section, the taker and lessor must take into account the calculation of the allocation between leasing and unleased items or between several lease elements within a single agreement. In addition, after identifying the rental and non-rental elements, they must assess the duration of the lease and the amount of rental payments in order to correctly identify and measure the lease. Another complication is the determination of initial direct costs; In other words, costs that would not have been incurred if the parties had not entered into a lease agreement. An example of initial direct costs would be the brokerage costs incurred during the execution of the lease. A leasing contract is considered a financing lease when it transfers most of all the risks and income to the property. All other leases are classified as operating leases. The classification is carried out at the beginning of the lease agreement. [IAS 17.4] For a transaction that results in an operational lease: [IAS 17.61] At least one of the following criteria must be met to consider the lease as a lease-financing contract: First billing The initial accounting is that the underwriter should capitalize the lease-related assets and establish a leasing debt for the value of the assets recorded. The balance sheet is as follows: Dr. Cr Finance Leasing-Haftung`s long-term assets (This should be used by the use of the lowest of the fair value of the asset or the present value of minimum rental payments.) – Note: The current value of the minimum rental payments is essentially the payment of the lease over the term of the lease agreement.) , which is discounted to the present value – This figure is received either in the review of the F7 document or, if not, use the fair value of the asset. You are not expected to calculate minimum rental payments.
Figure 2 shows changes to leasing accounting. At the end of the two-year period, the user fee was depreciated to $869,510 and the lease debt to $895,000, a difference of $25,490. In years 1 and 2, net income was reduced by $162,745, but cash outflows were only $150,000, resulting in a net add-back in the operating portion of cash flow billing of $12,745 per year.