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U.S. GAAP Codification of Accounting Standards
Codification Topic 840-30: Capital Leases

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Codification Topic 840-30
Capital Leases

Leases

SFAS 13, November 1976
"Accounting for Leases"

Lease classification criteria
(A) Ownership transfer
--> Ownership is transferred by the end of the lease term
(B) Bargain purchase option
-> Lessee has an option purchase at the price lower than the fair value
(C) Lease term: 75% rule
--> Lease term ≥ 75% of economic life of the leased property
(D) Minimum lease payment: 90% rule
--> Present value of minimum lease payments > 90% of fair value of the leased property

Additional criteria for lessor
(E) Collectibility of minimum lease payment
--> reasonably predictable
(F) No important uncertainties
--> about the additional costs to be incurred by lessor
--> when such costs are not reimbursable

Capital lease by lessee
1. A lease meets any of (A), (B), (C), (D)
2. The leased property is recognized as an asset by lessee

Capital lease by lessor
A lease is classified as one of the following
(1) sales-type lease
(2) direct financing lease
(3) leveraged lease

Sales-type lease
1. A lease satisfies any of (A), (B), (C), (D) and both of (E), (F)
2. The lessor gets manufacturer's or dealer's profit or loss

Direct financing lease
1. A lease satisfies any of (A), (B), (C), (D) and both of (E), (F)
2. The lessor does not get manufacturer's or dealer's profit
3. A lease does not meet the leveraged lease criteria

Leveraged lease
1. A lease satisfies any of (A), (B), (C), (D) and both of (E), (F)
2. The lessor does not get manufacturer's or dealer's profit
3. A lease meets all of (G), (H), (I)

Leveraged lease combines two transactions into one
Transaction 1: lessor borrows money and purchases the leased property
Transaction 2: lessor leases the property to lessee

Manufacturer's or dealer's profit or loss
--> when fair value ≠ carrying amount of the leased property
--> profit when fair value > carrying amount
--> loss when fair value < carrying amount

Leveraged lease criteria
(G) A lease involves at least three parties
--> a lessee, a lessor (equity participant), a long-term creditor
(H) Financing by long-term creditor
--> provides substantial leverage to the lessor
--> is nonrecourse as to the lessor's general credit
(I) Lessor's net investment
--> declines during early periods
--> rises during later periods

Capital lease accounting by lessee
--> Recognize the leased property as an asset
--> and recognize a liability for lease payment

Accounting by lessor
1. Sales-type lease
--> The lessor records the lease same as a sale of the property
--> Sales, cost of goods sold, lease receivable, unearned income are recognized by the lessor

2. Direct financing lease
--> Asses is derecognized from the lessor's records
--> Lease receivable, unearned income are recognized by the lessor

3. Leveraged lease
--> The lessor recognizes the following:
(a) rentals receivable
(b) unearned and deferred income
(c) residual value of leased property
(d) investment tax credit, if applicable

International Financial Reporting Standards (IFRS)

IAS 17: Leases

Codification Topic 840
Leases

Subtopics of Codification Topic 840

   840-10 Overall
   840-20 Operating leases
   840-30 Capital leases
   840-40 Sale-leaseback transactions

Accounting Terms of Codification Topic 840-10

   Bargain purchase option
   Bargain renewal option
   Capital lease
   Contingent rentals
   Direct financing lease
   Estimated economic life
   Estimated residual value
   Fair value of leased property
   Fiscal funding clause
   Heat supply (or burn-up) contracts
   Incremental borrowing rate
   Indirectly related to the leased property
   Interest rate implicit in the lease
   Lease
   Lease inception
   Lease term
   Leveraged lease
   Minimum lease payments
   Noncancelable lease term
   Operating lease
   Penalty
   Probable
   Reasonably possible
   Remote
   Sales-type lease
   Significant influence
   Sublease
   Substantially all

Accounting Terms of Codification Topic 840-20

Construction period lease payments
Original lessee

Accounting Terms of Codification Topic 840-30

   Advance refunding
   Delayed equity investment
   Interest method
   Nonrecourse financing

Accounting Terms of Codification Topic 840-40

   Active use of the property
   Minor
   Normal leaseback
   Profit or loss on sale
   Property improvements or integral equipment
   Sale-leaseback accounting
   Sale recognition
   Wrap lease transaction