Accounting for Leases

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Financial Statements Overview

Classification of Leases by Lessee

Statement of Financial Accounting Standards (SFAS) No. 13
            " Accounting for Leases"
            Issued in November 1976

Capital Leases: Leases that meet one or more of the capital lease criteria.

Operating Leases: All other leases.

Capital Lease Criteria

Transfers ownership of the property
--> to the lessee by the end of the lease term.

Contains a bargain purchase option.

Lease term is
               --> equal to 75 percent or more
                     of economic life of leased property.

Present value of the minimum lease payments
              ( at the beginning of the lease term)
              --> equals or exceeds 90 percent of
                    the excess of the fair value of the leased property
               [SFAS 13, Para. 7]

Classification of Leases by Lessor

Sales-type Leases

      Leases that meet
           --> one or more of the capital lease criteria
           --> and both sales-type and direct financing lease criteria.

          and
           --> give manufacturer's or dealer's profit (or loss)
                 to the lessor

Direct Financing Lease

      Leases that meet
           --> one or more of the capital lease criteria
           --> and both sales-type and direct financing lease criteria.

          but
           --> do not give manufacturer's or dealer's profit (or loss)
                 to the lessor

Operating Leases: All other leases.

Sales-type and Direct Financing Lease Criteria

Collectibility of the minimum lease payments
           --> is reasonably predictable.

No important uncertainties
           --> surround the amount of unreimbursable costs
                 yet to be incurred by the lessor.
                 [SFAS 13, Para. 8]

Summary of Lease Classifications

Lessee:

      Does the lease meet one or more of the capital lease criteria?
           If the answer is no
                 --> it is an operating lease.

           If the answer is yes
                 --> it is a capital lease

Lessor:

Does the lease meet one or more of the capital lease criteria?

      If the answer is no
          --> it is an operating lease.

      If the answer is yes,
        --> Does the lease meet both
                    of the sales-type and direct financing lease criteria?

           If the answer is no
              --> it is an operating lease.

           If the answer is yes,
              --> Does the lease give manufacturer's or dealer's profit or loss to lessor?

                    If the answer is no
                        --> it is a direct financing lease.

                    If the answer is yes
                        --> it is a sales-type lease.

Other Accounting Topics

Inventory Valuation Methods

Depreciation Methods

Revenue Recognition Principle

Accrual Basis vs. Cash Basis Accounting

Basics of Journal Entries

Ratios for Financial Statement Analysis

U.S. GAAP by Topic

Statements of Financial Accounting Standards (SFAS)