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Lease Accounting Basics For Non-Accountants Caia Brookes, 2009
In This Presentation: ,[object Object],[object Object],[object Object],[object Object],[object Object]
What is a Lease? ,[object Object],[object Object],[object Object],[object Object]
What are T-accounts? Asset  1000 Debit on the left Credit on the right Debits must equal credits for any given activity Also can be written: DR  Asset  1000 CR  Cash  1000 Cash  1000 A way of visualizing an activity hitting your general ledger – each ‘T’ is a general ledger (GL) account
What are T-accounts? Accounts Payable 1000 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],1000 700
Before the Lease – Purchasing the Asset The lessor used to have CASH, but now they have exchanged it for an ASSET (in this case,  a fleet of trucks). The value of that asset  will decrease over time, via depreciation. CASH Asset Cost Purchase Depreciation
Purchase – Example of GL Postings Cash  Asset (Trucks) 10000 10000 Cash paid = 10000  * Disclaimer: I made this and the other figures in these examples up! Not necessarily realistic! *
Depreciation – Example of GL Postings Depreciation  Asset (Trucks) 10000 50 Depreciation this period = 50 50 Cash  10000 Asset value is now 9950
Operating Lease ,[object Object],[object Object],[object Object]
Rent Income – Example of GL Postings Depreciation  Asset (Trucks) 10000 50 Rent this period = 100 50 Cash  10000 Rent Income  100 100 (Advanced topic: rent may be ACCRUED to income over time rather than recognized as income upon payment)
Finance Lease (or ‘Capital’ Lease) ,[object Object],[object Object]
Classification Criteria - FAS13 ,[object Object],[object Object],[object Object],[object Object],Is ANY of these true? Cost/value at inception = FMV? NO YES YES NO CAPITAL LEASE OPERATING LEASE DIRECT FINANCE LEASE SALES-TYPE LEASE
Tax Treatment of Finance Leases ,[object Object],[object Object],[object Object]
Classification Criteria - IRS ,[object Object],[object Object],[object Object],Is ANY of these true? NO YES TRUE TAX LEASE LOAN
Finance Lease Concepts ,[object Object],[object Object],[object Object]
Loans – Review for Comparison ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Loans – Example of GL Postings Loan Principal 10000 Principal given to the borrower = 10000 Cash  10000 Notice that any collateral asset  doesn’t appear  on the GL
Loan Payment – Example of GL Postings Loan Principal 10000 Loan payment this period = 100 10 Cash  10000 Interest Income  90 100 (Advanced topic: income may be ACCRUED over time rather than recognized as income upon payment) Loan value is now 9990 Loan payment = principal repayment 10 and interest 90
Loan Math vs. Finance Lease Math ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Put Another Way… ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Finance Lease GL Accounts ,[object Object],[object Object],[object Object],[object Object],[object Object]
Setting Up the Finance Lease -  Where’s the ‘Asset?’ The lessor used to have a hard ASSET (trucks) on the books, but now they have exchanged it for a LEASE (a financial asset, even if it isn’t a tangible asset). The value of this asset will decrease over time, via AMORTIZATION. Asset Cost Lease Out Amortization Total Rec U/e inc Residual Purchase CASH
Finance Lease GL Postings - Before Hard Asset  10000 ,[object Object],[object Object],[object Object],[object Object],Total Receivable Unearned Income Residual  Cash  10000
Finance Lease GL Postings - After Hard Asset  10000 ,[object Object],[object Object],[object Object],[object Object],Total Receivable Unearned Income Residual  Cash  10000 10000 10000 30000 30000 9000 9000
Finance Lease GL Postings - After Hard Asset  10000 ,[object Object],[object Object],[object Object],[object Object],Total Receivable Unearned Income Residual  Cash  10000 10000 10000 30000 30000 9000 9000 These accounts hold the lease value Notice the hard asset (trucks) have NO VALUE on the books while on a finance lease.
Finance Lease Payment GL Postings Net decrease in  lease value  10 Lease income   90 Lease payment  100 Hard Asset  10000 Total Receivable Unearned Income Residual  Cash  10000 10000 10000 30000 30000 9000 9000 100 90 90 100 Lease Income  Income is calculated similar to loan interest income, using the implicit interest rate (Advanced topic: income may be ACCRUED over time rather than recognized as income upon payment)
End of Lease  ,[object Object],[object Object]
Life of a Finance Lease –  Where’s the ‘Asset?’ CASH Asset Cost Purchase Lease Out End of Lease Sell Depreciation Amortization Total Rec U/e inc Residual

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Lease Accounting Basics

  • 1. Lease Accounting Basics For Non-Accountants Caia Brookes, 2009
  • 2.
  • 3.
  • 4. What are T-accounts? Asset 1000 Debit on the left Credit on the right Debits must equal credits for any given activity Also can be written: DR Asset 1000 CR Cash 1000 Cash 1000 A way of visualizing an activity hitting your general ledger – each ‘T’ is a general ledger (GL) account
  • 5.
  • 6. Before the Lease – Purchasing the Asset The lessor used to have CASH, but now they have exchanged it for an ASSET (in this case, a fleet of trucks). The value of that asset will decrease over time, via depreciation. CASH Asset Cost Purchase Depreciation
  • 7. Purchase – Example of GL Postings Cash Asset (Trucks) 10000 10000 Cash paid = 10000 * Disclaimer: I made this and the other figures in these examples up! Not necessarily realistic! *
  • 8. Depreciation – Example of GL Postings Depreciation Asset (Trucks) 10000 50 Depreciation this period = 50 50 Cash 10000 Asset value is now 9950
  • 9.
  • 10. Rent Income – Example of GL Postings Depreciation Asset (Trucks) 10000 50 Rent this period = 100 50 Cash 10000 Rent Income 100 100 (Advanced topic: rent may be ACCRUED to income over time rather than recognized as income upon payment)
  • 11.
  • 12.
  • 13.
  • 14.
  • 15.
  • 16.
  • 17. Loans – Example of GL Postings Loan Principal 10000 Principal given to the borrower = 10000 Cash 10000 Notice that any collateral asset doesn’t appear on the GL
  • 18. Loan Payment – Example of GL Postings Loan Principal 10000 Loan payment this period = 100 10 Cash 10000 Interest Income 90 100 (Advanced topic: income may be ACCRUED over time rather than recognized as income upon payment) Loan value is now 9990 Loan payment = principal repayment 10 and interest 90
  • 19.
  • 20.
  • 21.
  • 22. Setting Up the Finance Lease - Where’s the ‘Asset?’ The lessor used to have a hard ASSET (trucks) on the books, but now they have exchanged it for a LEASE (a financial asset, even if it isn’t a tangible asset). The value of this asset will decrease over time, via AMORTIZATION. Asset Cost Lease Out Amortization Total Rec U/e inc Residual Purchase CASH
  • 23.
  • 24.
  • 25.
  • 26. Finance Lease Payment GL Postings Net decrease in lease value 10 Lease income 90 Lease payment 100 Hard Asset 10000 Total Receivable Unearned Income Residual Cash 10000 10000 10000 30000 30000 9000 9000 100 90 90 100 Lease Income Income is calculated similar to loan interest income, using the implicit interest rate (Advanced topic: income may be ACCRUED over time rather than recognized as income upon payment)
  • 27.
  • 28. Life of a Finance Lease – Where’s the ‘Asset?’ CASH Asset Cost Purchase Lease Out End of Lease Sell Depreciation Amortization Total Rec U/e inc Residual