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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)
 


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U.S. GAAP Codification
International Financial Reporting Standards (IFRS)
 
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
Overview of Financial Statements










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