Accounting for Leases under the New Standard · 2020. 4. 28. · Accounting for Leases under the...
Transcript of Accounting for Leases under the New Standard · 2020. 4. 28. · Accounting for Leases under the...
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Government Finance Officers Association
Accounting for Leases under the New
Standard
Webinar January 10, 2019
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Agenda
• Background• Definition and scope• Lease term• Short-term leases• Lessee accounting and financial reporting• Lessor accounting and financial reporting• Variations on lease contracts
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Background
GASB Statement No. 87, Leases, revises existing standards on lease accounting and financial reporting (primarily Statement No. 62)• Issued June 2017• Effective for periods beginning after December
15, 2019 • Earlier application is encouraged• COD section L20 - Leases
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Why is this a big deal?
Definition of leases has changed• “Capital” and “operating” lease terminology goes
away Must evaluate all current leases and contracts
to determine if they meet the GASB 87 definition of a lease• Leases previously not reported because they were
operating, may now need to be added to the financial statements
Standard is to be applied retroactively
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Why is this a big deal? (cont.) Existing leases must be measured and recognized
based on facts and circumstances of the lease in the period of implementation of GASB 87, not inception of the lease.
If administration of leases is decentralized across your organization, may be difficult to determine what contracts are subject to the new lease accounting.
While net position generally unaffected (lease debt offset by intangible lease asset), the increase in reported debt for lessee governments that currently have operating leases may impact debt limits, covenants, and statutes.
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GASB Statement No. 87
Establishes single model for lease accounting• Underlying foundation - leases are financings Leases no longer classified as operating or
capital Exceptions for lessors and lessees
• Short-term leases• Contracts that transfer ownership and do not
contain termination options
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Definition of a Lease7
A contract that conveys control of the
right to use
another entity’s nonfinancial asset
(the underlying asset)
as specified in the contract for a period
of time
in an exchange or exchange‐like transaction
Common nonfinancial assets that are leased• Land• Buildings• Vehicles• Equipment
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Definition of a Lease (continued)
Control requires both of the following:• (1) the right to obtain the present service capacity from use of the
underlying asset, and • (2) the right to determine the nature and manner of use of the
underlying asset
Control applied to the right-to-use lease asset (a capital asset) “specified in the contract”• Control criteria NOT limited to contracts that convey substantially all of
the present service capacity from use of the underlying asseto Right-to-use lease assets include rights to use underlying assets for
portions of time, such as certain days each week or certain hours each day
Includes contracts not explicitly defined as “leases”, but that otherwise meet the definition
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Exclusions from Scope of Leases9
Intangible assets (mineral rights, patents, copyrights, computer software), except for thesublease of an intangible right-to-use asset
Biological assets (including timber, living animals, and living plants
Inventory
Service concession arrangements (see GASBStatement No. 60, paragraph 4)
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Exclusions from Scope of Leases (continued)
Assets financed with outstanding conduit debt, unless both the asset and the conduit debt are reported by the lessor
Supply contracts (such as typical power purchase agreements, which do not convey control of the rightto use the underlying power generating facility)
Contracts for services, except those contracts thatcontain both a lease component and a servicecomponent
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Exclusions from Scope of Leases (continued)
Certain regulated leases (airport-airline agreements)
Leases of assets that are reported as investments (meets requirements of GASB No. 72 to be reported at fair value)
Leases that transfer ownership and do not contain termination options
$1 Leases
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Lease Term12
Noncancelable period during which lessee has right to use the underlying asset
Any periods in which the lessee or the lessor has the sole option to
extend lease, if reasonably certain the
option will be exercised by that party
Any periods in which the lessee or the lessor has the sole option to terminate lease, if
reasonably certain the option will not be
exercised by that party
Lease Term
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Lease Term
• Ignores fiscal funding or cancellation clause, unless reasonably certain the clause will be exercised
• Excludes cancelable periods – Periods for which both lessee and lessor have an option to terminate lease without permission from the other party (or if both have to agreed to extend)
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Reassess Lease Term 14
Reassess lease term only if one or more of the following occurs:
Lessee/lessor decides to exercise option that
was not originally deemed reasonably
certain to be exercised
Lessee/lessor decides not to exercise option that was originally deemed reasonably
certain to be exercised
An event specified in contract that requires
an extension or termination has taken
place
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Short-Term Lease Exception
Short-term lease• At inception, has a “maximum possible term” of 12
months or less, including any options to extend, regardless of the probability the options will be exercised
A lease that is cancelable by either party, such as month-to-month or year-to-year lease, the maximum possible term is the noncancelableperiod, including any notice period
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Accounting for Short-Term Leases
Lessee Lessor
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Recognize lease payments as expenses/
expenditures; asset for advance
payments (prepaid); liability
for rent due
• No recognition of expenditure/expense and revenue during rent holiday• No required note disclosures
Recognize lease payments as
revenue; liability for advance
payment; asset for rent due
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EXAMPLEWhat is the Lease Term under GASB 87?
“This Agreement commences on the first date the Equipment is accepted by the lessee, and ends on the later of the last day of the Minimum Lease Term (“Term”) of ten months, or the Extension Period (as herein defined). At the end of the Term, this Agreement is extended on a month-to-month basis until the Equipment is returned to the lessor (the “Extension Period”). During the Extension Period the lessor has the right to, on 15 days notice, increase the rate per month . . . . After the end of the Term either party can terminate this Agreement on 15 days written notice.”
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EXAMPLEWhat is the Lease Term under GASB 87?
“The lessor agrees to lease the vehicle to the lessee for an Initial Term beginning on January 1, 2018 and ending on December 31, 2022. The lessee has the option to renew the lease for five additional years. The lessee shall exercise the option to renew by giving written notice to the lessor not less than ninety (90) days prior to the expiration of the Initial Term.”
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EXAMPLEWhat is the Lease Term under GASB 87?
“The lessor agrees to lease the vehicle to the lessee for an Initial Term beginning on January 1, 2018 and ending on December 31, 2022. The lessee has the option to renew the lease for five additional years. The lessee shall exercise the option to renew by giving written notice to the lessor not less than ninety (90) days prior to the expiration of the Initial Term.” The lessor or lessee may terminate this lease at any time, with five (5) days written notice.
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EXAMPLEWhat is the Lease Term under GASB 87?
“The lessor agrees to lease three floors of a building to the lessee for an Initial Term beginning on September 1, 2018 and ending on August 31, 2026. The lessee has the option to renew the agreement for two (2) additional years by giving written notice to the lessor not less than ninety (90) days prior to the expiration of the Initial Term. The lessee may terminate the agreement any time after August 31, 2023 with written notice to the lessor at least ninety (90) days prior to termination.”
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Assets Liabilities Deferred Inflow of Resources
Lessee Intangible (right‐to‐use) lease asset equal to the value of lease liability + lease prepayments made for future periods + any direct ancillary costs necessary to place asset into service (not debt issuance costs)
Present value of future lease payments expected to be made during lease term (includes fixed payments, variable payments based on rate or index, reasonably certain residual guarantees, other reasonable certain payments)
Lessor Lease receivable (generally includes same amounts as lessee liability)Continue to report leased asset (capital asset)
Equal to lease receivable + any prepayments received for future periods
Initial Recognition - Overview
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Assets Liabilities Deferred Inflow of Resources
Lessee Amortize intangible right‐to‐use asset in rational and systematicmanner over shorter of useful life of the underlying leased asset or lease term, unless a purchase option that is reasonably certain to be exercised. Then, amortize over useful life of underlying asset.
Reduce liability for actual lease payments, less amounts for interest expense
Lessor Reduce receivable for actual lease payments received, less amounts for accrued interest
Depreciate leased asset (unless indefinite life or requirement to be returned in its original or enhanced condition)
Recognize leaserevenue in a rational and systematic manner over the lease term
Subsequent Reporting - Overview
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LESSEEAccounting and Financial Reporting
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LESSEERecognition and Measurement
At commencement of lease term Economic resources measurement focus (full accrual)Recognize a liability for present value of future lease payments and an intangible right-to-use asset (the leased capital asset)DR Intangible right-to-use lease asset
CR Lease liability
Current financial resources measurement focus (modified accrual)DR Expenditures – capital outlay
CR Other financing sourcesTo record capital expenditure and related financing from lease
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Lease Liability
Fixed lease
payments
Certain variable payments
Purchase options
Residual value
guarantees
Termination penalties
Any other reasonably certain
payments
LESSEEInitial Measurement
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LESSEEInitial Measurement (cont.)
Lease liability • Does not include lease payments dependent
on lessee’s future performance or usage of underlying asset
• Discount future lease liability payments
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Discount Rate
Interest rate charged by lessor (may be implicit in the agreement), or Lessee’s own borrowing rate (if interest rate
cannot be readily obtained)
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Rate implicit in the lease agreementSum of the present value of lease payments + present value of any unguaranteed residual value
Sum of the fair value of underlying asset + any initial direct costs incurred by lessor (registration, legal, transportation, etc.)
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What are Lease Incentives?
Payments made to, or on behalf of, the lessee for which the lessee has a right of offset with its obligation to the lessor
Or other concessions granted to the lessee• Rebates/discounts• Assumptions of preexisting lease obligations to a third-
party• Other reimbursements of lessee costs• Rent holidays• Reductions of interest or principal charges by the lessor
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How Do We Account for Lease Incentives?
Payments provided to, or on behalf of, lessee at or before commencement of lease term• Include in initial measurement as a reduction of right-to-use
asset Payments provided after commencement of lease term
• Reduce lease payments for periods in which incentive payments will be provided
• If incentive payments are fixed or fixed in substance oInclude in initial measurement or remeasurement as a reduction of
right-to-use asset• If variable or contingent lease incentive payments
oDo not include in initial measurement of right-to-use asset
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Example #1 – Government is Lessee 30
Assumptions: Government enters into a five-year lease for capital equipment
(60 months) on April 1. Monthly payments of $1,000 are due on the first of every month.
Total monthly payments = $60,000. First payment due on April 1. Government has the option to purchase equipment for $2,000 at
end of lease term, that it is reasonably certain they will exercise. Payment must be made 30 days before end of lease term.
Government incurs transportation costs of $2,500 to get equipment ready to place into service.
Government estimates the useful life of the equipment at seven years (84 months).
Annual interest rate charged on lease is 3%. Government’s fiscal year end is December 31.
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Step 1 – Calculate the Lease Liability
Lease liability = present value of future payments expected to be made over lease term (present value of monthly payments + present value of $2,000 purchase payment at end)• Present value of $1,000 monthly payments = $55,791
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Rate = Interest rate per period (3%/12)Nper = Total number of payment periodsPmt = Payment made each periodFv = Future valueType = 1 (payment made at beginning of period
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Step 1 – Calculate the Lease Liability (cont.)
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Present value of $2,000 purchase payment at end = $1,725
Present value of lease liability to recognize is $55,791 + $1,725 = $57,516
Rate = Interest rate per period (3% annual)Nper = Total number of payment periods (5 years)Pmt = Payment made each periodFv = Future valueType = 1 (payment made in last month of
lease)
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Step 2 - Calculate Amortization of Discount on Lease Liability
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amortization of lease paymentsAnnual interest rate 3.00%monthly rate 0.0025periods 60 Payment per year 12 Amount 55,791$ Payment 1,000$ =PMT(.0025,60,‐55791,0,1)
Payment Number Payment Interest Principal Balance57,516$
1 1,000$ ‐$ 1,000$ 56,516 2 1,000 141 859 55,657 3 1,000 139 861 54,796 4 1,000 137 863 53,933 5 1,000 135 865 53,068 6 1,000 133 867 52,201 7 1,000 131 869 51,332 8 1,000 128 872 50,460 9 1,000 126 874 49,586
The $1,000 monthly payment is based on the present value of $60,000 due over the 60 months of the lease. Since the lessee government is also liable for the $2,000 purchase option due on the 60th month, the total lease liability to amortize at inception is $57,516.
59 1,000 10 990 2,993 60 3,000 7 2,993 ‐
The final $3,000 payment represents the $1,000 payment due for the 60th month, plus the $2,000 purchase option due at the end of the lease term.
$56,516 x .0025
Payment ‐ Interest
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Step 3 – Calculate the Intangible Right-to-use Lease Asset
$ 57,516 lease liability+ 2,500 transportation costs to place
asset into service$60,016 intangible right-to-use lease asset
to record
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Step 4 – Calculate Amortization of Intangible Right-to-use Lease Asset
amortization of lease assetLease asset value 60,016$ Useful life (months) 84 Monthly amortization 714$ Annual amortization 8,568$
Month Number Amortization Balance60,016$
1 714$ 59,302 2 714 58,588 3 714 57,874 4 714 57,160 5 714 56,446 6 714 55,732 7 714 55,018 8 714 54,304 9 714 53,590
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Amortize asset in rational and systematic manner over shorter of life of underlying leased asset or lease term, unless purchase option that is reasonably certain to be exercised. Then, amortize over useful life of underlying asset.
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If Lease Paid from a Governmental Fund
Journal entries – April 1General fund
DR Expenditures – capital outlay $57,516CR Other financing source-
inception of lease $57,516To record capital expenditure and related financing from lease of equipment
DR Expenditures – capital outlay $ 2,500CR Cash $ 2,500
To record expenditure for transportation costs to place asset into service
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If Lease Paid from a Governmental Fund
Journal entries – monthly lease payments
General fund
On December 31 – Total of 9 months lease payments
DR Expenditures – debt service principal $7,930DR Expenditures – debt service interest $1,070
CR Cash $9,000To record monthly lease payments based on amortization of lease payments schedule.
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Year-end Adjustments for Government-wide Statements
DR Intangible right-to-use lease asset $60,016CR Expenditures – capital outlay $60,016
To recognize lease asset
DR Other financing source –inception of lease $57,516
CR Lease liability $57,516To recognize lease liability
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Year-end Adjustments for Government-wide Statements (cont.)
DR Lease liability $7,930CR Expenditures – debt service principal $7,930
To recognize monthly lease payments for principal
DR Amortization expense $6,426CR Intangible right-to-use lease asset $6,426
To amortize intangible right-to-use lease asset over the useful life of the underlying asset
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Summary of Transactions
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General Fund Transactions DR/(CR) Gov't‐wide adjustments DR/(CR)Entry # 1 2 3 4 5 6 7
Inception of lease
exps to get asset in place
debt service pmts
Total General Fund
Recognize lease liability
Recognize lease asset
Lease principal pmts
Asset amortization
Total Gov't Wide
Consolidated totals, accrual
Cash (2,500) (9,000) (11,500) ‐ (11,500) Lease asset (intangible right‐to‐use) ‐ 60,016 (6,426) 53,590 53,590 Lease liability ‐ (57,516) 7,930 (49,586) (49,586) Expenditures ‐ capital outlay 57,516 2,500 60,016 (60,016) (60,016) ‐ Expenditures ‐ debt service principal 7,930 7,930 (7,930) (7,930) ‐ Expenditures ‐ debt service interest 1,070 1,070 ‐ 1,070 Other financing source ‐ inception of lease (57,516) (57,516) 57,516 57,516 ‐ Amortization expense ‐ 6,426 6,426 6,426
net ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐
Entries 1, 2, 4, 5 are made at the inception of the lease
Entries 3, 6, 7 represent the total amount of monthly payments made in the fiscal year.
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If Lease Paid from a Proprietary Fund
Journal entries – April 1Enterprise fund
DR Intangible right-to-use lease asset $60,016CR Lease liability $57,516CR Cash $ 2,500
To record leased right-to-use asset, related liability, and payment of transportation costs to place asset into service
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If Lease Paid from a Proprietary Fund
Journal entries – monthly paymentsProprietary funds
On December 31 – Total of 9 months lease payments and amortization expense
DR Lease liability $7,930DR Expense – debt service interest $1,070
CR Cash $9,000To record monthly lease payments based on amortization of lease payments schedule.
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If Lease Paid from a Proprietary Fund
Journal entries – monthly payments (cont.)
Enterprise fund
DR Amortization expense $6,426CR Intangible right-to-use lease asset $6,426
To amortize intangible right-to-use lease asset over its useful life
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LESSEE—Disclosures
1. General description of leasing arrangementsa. Basis, terms, and conditions, on which variable lease
payments not included in lease liability are determined b. Existence, terms, and conditions, of any residual value
guarantees provided by the lessee2. Total amount of assets recorded under leases with the
related accumulated amortization; disclosed by major class and separately from other capital assets
3. Variable lease payments recognized during the period that are not included in lease liability
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LESSEE—Disclosures (continued)
5. Other payments recognized during the period that are notincluded in lease liability (such as residual value guarantees or penalties)
6. Maturity analysis of all future lease payments a. Payments for each of the first five yearsb. Payments in five-year increments thereafterc. Display principal and interest separately
7. Lease commitments, other than short-term leases, for which the lease term has not yet begun
8. Components of any loss associated with an impairment (gross impairment loss less any related change in lease liability)
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LESSEE – (Example)Note Disclosure
The government entered into a five-year lease for capital equipment on April 1, 2018. Monthly payments of $1,000 are due, with the first payment made on April 1, 2018. The government has the option to purchase the equipment for $2,000 at the end of the lease term, which it is reasonable certain it will exercise. The estimated useful life of the equipment is seven years. The annual interest rate charged on the lease is 3%.
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LESSEE (Example)Capital Assets Note Disclosure
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Beginning Balance Increases Decreases Ending Balance
Capital assets not being depreciated Land 11,249,368$ ‐$ (5,872)$ 11,243,496$ Construction in progress 5,490,822 2,890,542 (1,675,307) 6,706,057 Total capital assets not being depreciated 16,740,190 2,890,542 (1,681,179) 17,949,553
Other capital assets Buildings and improvements 225,636,411 19,755,467 (15,094,265) 230,297,613 Equipment 40,078,664 1,170,842 (15,679) 41,233,827 Intangible right‐to‐use lease asset ‐ 60,016 ‐ 60,016 Total other capital assets at historical cost 265,715,075 20,986,325 (15,109,944) 271,591,456 Less accumulated depreciation for Buildings and improvements (52,010,244) (5,871,627) 13,534,181 (44,347,690) Equipment (20,204,312) (981,565) 15,679 (21,170,198) Less accumulated amortization for intangible right‐to‐use lease asset ‐ (6,426) ‐ (6,426) Total accumulated depreciation and amortization (72,214,556) (6,859,618) 13,549,860 (65,524,314) Other capital assets, net 193,500,519 14,126,707 (1,560,084) 206,067,142 Total capital assets, net 210,240,709$ 17,017,249$ (3,241,263)$ 224,016,695$
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LESSEE – (Example)Principal and Interest Requirements to Maturity
At December 31, 2018, the principal and interest requirements to maturity are all follows:
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Fiscal Year Ended
December 31Principal Payments
Interest Payments Total
2019 10,656 1,344 12,000 2020 10,982 1,018 12,000 2021 11,316 684 12,000 2022 11,660 340 12,000 2023 4,972 28 5,000
49,586$ 3,414$ 53,000$
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LESSORAccounting and Financial Reporting
49M32
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Slide 49
M32 I suggest asking a couple more questions at this point to break things up.MLevine, 12/28/2018
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LESSORRecognition and Measurement
At commencement of lease term Economic resources measurement focus (full accrual)Recognize a lease receivable and a deferred inflow of resources for present value of future lease payments to be receivedDR Lease receivable
CR Deferred inflow of resources
Current financial resources measurement focus (modified accrual)Governmental funds – Recognize deferred inflow of resources as revenue when available
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LESSORRecognition and Measurement (cont.)
Economic resources measurement focus:
Continue to report capital asset underlying the lease Continue to depreciate the asset during
lease term, unless the asset has an indefinite life or contract requires lessee to return asset in its original or enhanced condition
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Discount Rate - Lessor
Interest rate lessor charges the lessee • Interest rate may be implicit in the agreement
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Sum of the present value of lease payments + present value of any unguaranteed residual value
Sum of the fair value of underlying asset + any initial direct costs incurred by lessor (registration, legal, transportation, etc.)
Rate implicit in the lease agreement
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Lease Receivable
Fixed lease payments, less any incentives given
Certain variable payments
Residual value guarantees
LESSORInitial Measurement
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Deferred Inflow of Resources
Lease receivable
PLUS:Any prepayments received before
start of lease term that relate to future
periods
LESS:Any lease
incentives given before start of lease term
LESSORInitial Measurement
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Example #1 – Government is Lessor55
Assumptions: Government (lessor) enters into a five-year contract to lease its
capital equipment (60 months) on April 1. Monthly payments of $1,000 are due on the first of every month.
Total monthly payments = $60,000. First payment due on April 1. Lessee has the option to purchase equipment for $2,000 at end of
lease term, that it is reasonably certain they will exercise. Payment must be made 30 days before end of lease term.
Lessor continues to depreciate the equipment with a historical cost of $60,000 and an estimated useful life of 8 years.
Annual interest rate charged on lease is 3%. Government’s fiscal year end is December 31.
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Step 1 – Calculate the Lease Receivable
Calculate in same manner as the lessee calculates the lease liability = present value of future payments expected to be received over lease term (present value of monthly payments + present value of $2,000 purchase payment at end) Present value of monthly payments = $55,791
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Rate = Interest rate per periodNper = Total number of payment periodsPmt = Payment made each periodFv = Future valueType = 1 (payment made at beginning of period
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Step 1 – Calculate the Lease Receivable (cont.)
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• Present value of $2,000 purchase payment at end = $1,725
Present value of lease receivable to recognize is $55,791 + $1,725 = $57,516
Rate = Interest rate per periodNper = Total number of payment periodsPmt = Payment made each periodFv = Future valueType = 1 (payment made in last month of
lease)
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Step 2 - Calculate Amortization of the Discount on Lease Receivable
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amortization of lease paymentsAnnual interest rate 3.00%monthly rate 0.0025periods 60 Payment per year 12 Amount 55,791$ Payment 1,000$ =PMT(.0025,60,‐55791,0,1)
Payment Number Payment Interest Principal Balance57,516$
1 1,000$ ‐$ 1,000$ 56,516 2 1,000 141 859 55,657 3 1,000 139 861 54,796 4 1,000 137 863 53,933 5 1,000 135 865 53,068 6 1,000 133 867 52,201 7 1,000 131 869 51,332 8 1,000 128 872 50,460 9 1,000 126 874 49,586
The $1,000 monthly payment receivable is based on the present value of $60,000 in payments received over the 60 months of the lease. Since the lessor government will also receive the $2,000 purchase option on the 60th month, the total lease receivable to amortize at inception is $57,516.
59 1,000 10 990 2,993 60 3,000 7 2,993 ‐
The final $3,000 payment receivedrepresents the $1,000 payment received for the 60th month, plus the $2,000 purchase option received at the end of the lease term.
$56,516 x .0025
Payment ‐ Interest
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Step 3 - Calculation of Deferred Inflow of Resources
Lease receivable - $57,516 Plus, any prepayments received before start of lease -
$0 Less, any incentives given to lessee before start of lease
- $0
Total deferred inflow of resources = $57,516
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Step 4 – Calculate Amortization of Deferred Inflow of Resources
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Amortize deferred inflow of resources in rational and systematic manner over the lease term.
Amortization of lease deferred inflow of resourcesDeferred inflow value 57,516$ Lease term (months) 60 Monthly amortization 959$ Annual amortization 11,508$
Month Number Amortization Balance57,516$
1 959$ 56,557 2 959 55,598 3 959 54,639 4 959 53,680 5 959 52,721 6 959 51,762 7 959 50,803 8 959 49,844 9 959 48,885 10 959 47,926
Year 1 amortization expense = $8,631($959 x 9 months)
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Journal Entry at Inception of Lease
Current financial resources measurement focus:General fund – April 1
DR Lease receivable $57,516CR Deferred inflow of resources $57,516
To record receivable and deferred inflow of resources from the lease of equipment
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Journal Entry for Monthly Lease Payments Received and Amortization
Current financial resources measurement focus:General fund – Year end (9 months for initial fiscal year)
DR Cash $9,000CR Lease receivable $7,930CR Interest income $1,070
To record receipt of first 9 months of lease payments
DR Deferred inflow of resources $8,631CR Lease revenue $8,631
To record lease income
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Journal Entry for Depreciation of Equipment
Economic resources measurement focus – Year-end
DR Depreciation expense $7,500CR Accumulated depreciation - buildings $7,500To record annual depreciation on underlying asset
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LESSOR—Disclosures
Lease activities may be grouped for disclosure purposes1. A general description of leasing arrangements
Basis, terms, and conditions on which any variable lease payments not included in the lease receivable are determined
2. The total amount of inflows recognized in the reporting period from leases, if not displayed on the face of the financial statements
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LESSOR—Disclosures (cont.)
3. Total amount of inflows recognized in reporting period for variable and other payments not included in measurement of lease receivable
4. If lease payments secure the lessor’s debt, disclose terms, or options by lessee to terminate the lease or abate payments
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LESSOR—Disclosures (cont.)
5. If lessor’s principal ongoing operations consist of leasing assets to other entities, should disclose:• Schedule of future payments included in lease
receivable• Separate principal from interest• Disclose for five subsequent fiscal years separately,
thereafter, in five-year increments
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LESSOR – (Example)Note Disclosure
The government entered into a contract to lease its capital equipment for a period of five years beginning on April 1, 2018. Monthly payments of $1,000 will be received, with the first payment received on April 1, 2018. The lessee has the option to purchase the equipment for $2,000 at the end of the lease term, which it is reasonable certain they will exercise. The annual interest rate charged on the lease is 3%.
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Variations on Lease Contracts
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Contracts with Multiple Components
Report lease and nonlease components as separate contracts Leases with multiple underlying assets
• Account for as separate contracts• Allocate contract price to the different assets if:
oLease terms are different for the underlying assets, ORoUnderlying assets are in differing major asset classes for
disclosure
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Contracts with Multiple Components (cont.)
Allocate based on contract prices for individual components• Based on contract terms, if reasonable If there are no stated prices for individual
components, or prices appear unreasonable• Use best estimate based on professional judgment If not practicable to determine best estimate,
account for components as single lease unit
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Contract Combinations
Contracts entered into at or near the same time with the same counterparty• Consider part of the same lease contract if either
of the following criteria is met:oContracts are negotiated as a package with a single
objectiveoAmount of consideration to be paid in one contract
depends on the performance or price of the other contract
Combined contracts subject to guidance for contracts with multiple components
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Lease Modifications and Terminations
Amendments made while contract is in effect that change the provisions of the contract Modification
• Amendment considered to be a modification unless lessee’s right to use the underlying asset decreases
Termination • Lessee’s right to use the underlying asset is
decreased• May be partial or full termination
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Lease Modifications
Lessee and lessor should report as new lease (separate from the most recent lease contract) if both are present:• New underlying assets are added for lessee• Not unreasonable priced Otherwise, remeasure existing lease
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Lease Modification Example Lessee and lessor enter into 10-year lease for 10,000
square ft. of space in a building. At the beginning of year 6, they decide to modify the existing agreement to provide an additional 5,000 square ft. of space for the remaining lease term. • New lease agreement - If consideration for additional space
commensurate with the market price for similar arrangements• Modification - If consideration is below market price for similar
leases, then report as a modification of existing lease agreement and remeasure
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Lease Modifications75
If increase in payments can’t be tied to increase in assets, remeasure and adjust.
Update discount rate if one or both occur:• Change in lease term• Change in likelihood of exercising purchase option
Lessee Lessor+/‐ Intangible right‐to‐use asset +/‐ Lease receivable+/‐ Lease liability +/‐ Deferred inflow of resources
Journal entries needed:
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Lease Terminations
Account for partial or full termination (other than a purchase) when lessee’s right to use the underlying asset is decreased or the number of underlying assets is reduced.
Journal entries needed:
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Lessee LessorReduce/remove Intangible right‐to‐use asset Reduce/remove Lease receivableReduce/remove Lease liability Reduce/remove Deferred inflow of resourcesDifference Gain or loss Difference Gain or loss
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Lease Terminations
If underlying asset is purchased by lessee:
Journal entries needed:
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Lessee LessorRemove Intangible right‐to‐use asset Remove/reduce Lease receivableRemove/adjust Lease liability Remove/reduce Deferred inflow of resources
Record Purchased capital asset in appropriate asset class
RemoveCarrying value of purchased asset (historical cost ‐ accumulated depreciation)
M40
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Slide 77
M40 From lessor's perspective, it's the sold asset, not the purchased asset.MLevine, 12/28/2018
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Subleases
Treat initial lease and sublease as separate transactions Original lessor
• Continue to apply lease guidance for lessor Original lessee
• Account for original lease and sublease separately, as the lessee and lessor respectively
• The two separate transactions should not be offset against one another
• Disclose sublease in disclosure of the general description of lease arrangements
New lessee• Apply general lessee guidance
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Sale-Leaseback Transactions
Sale of underlying asset by the owner and a lease of the property back to the seller (original owner)
Must qualify as sale to be eligible• If does not qualify as sale, transaction is a borrowing
Treat sale and lease transactions separately• However, any gain or loss on sale portion should be deferred
and recognized over term of leaseback If terms are significantly off-market, report difference
based on substance of transaction Disclose terms and conditions of sale-leaseback in
notes to financial statements
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Lease-Leaseback Transactions
Asset leased by one party (first party) to another party and then leased back to the first party
Account for as a net transaction because each part of transaction is with the same counterparty (right of offset exists)
Both parties should disclose gross amounts of lease and leaseback in notes to financial statements
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Intra-Entity Leases
Leases with blended component units• If lessor is blended component unit – Debts and assets of lessor
reported as if they were debts and assets of primary government
Leases between blended component units• Eliminations for internal leasing activity take place before financial
statements are aggregated
Leases with/between discretely presented component units• Treat like normal leases, however, present receivables and
payables separately
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Leases between Related Parties
Classification and accounting the same as for similar leases between unrelated parties• Exception: When substance is different from legal
form, recognize substance of the transactionoExample: A lease contract is structured to meet the terms of
short-term lease, but mutual understanding by parties that the lease will be extended for several years – Account for as a long-term lease
Lessee and Lessor - Disclose nature and extent of leasing transactions with related parties
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Start Planning Now! Effective for periods beginning after December 15,
2019
GFOA Advisory, Accounting for Leases• http://gfoa.org/accounting-leases
GASB Implementation Guide for Leases• Expected issuance of final guide in June 2019
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