TUGAS RINGKASAN MATA KULIAH AKUNTANSI KEUANGAN MENENGAH II ACCOUNTING FOR LEASES

Disusun oleh: Adhiyanto Puji Laksono (F0309002/A)

FAKULTAS EKONOMI UNIVERSITAS SEBELAS MARET 2011

ACCOUNTING FOR LEASES A. THE LEASING ENVIRONMENT What types of assets are being leased? Any type of equipment can be leased, such as railcars, helicopters, bulldozers, barges, CT scanners, computers, and so on. The largest group of leased equipment involves information technology equipment, followed by assets in the transportation area (trucks, aircraft, rail), and then construction and agriculture. Who Are the Players? A lease is a contractual agreement between a lessor and a lessee. This arrangement gives the lessee the right to use specific property, owned by the lessor, for an agreed period of time. The lessors that own this property generally fall into one of three categories: 1. Banks Banks are the largest players in the leasing business. 2. Captive leasing companies Captive leasing companies are subsidiaries whose primary business is to perform leasing operations for the parent company. 3. Independents Independents are the final category of lessors. Independents have not done well over the last few years. Advantages of Leasing 1. 100% financing at fixed rates 2. Protection against obsolescence 3. Flexibility 4. Less costly financing 5. Tax advantages 6. Off-balance-sheet financing Conceptual Nature of a Lease The various views on capitalization of leases are as follows: 1. Do not capitalize any leased assets 2. Capitalize leases that are similar to installment purchases 2

3. Capitalize all long term leases 4. Capitalize non-cancelable leases where the penalty for non-performance is substantial B. ACCOUNTING BY THE LESSEE A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. In order to record a lease as a finance lease, the lease must be non-cancelable. The IASB identifies the four criteria for assessing whether the risks and rewards have been transferred in the lease arrangement. Capitalization Criteria (Lessee) 1. The lease transfers ownership of the property to the lessee 2. The lessee contains a bargain-purchase option 3. The lease term is for the major part of the economic life of the asset 4. The present value of the minimum lease payments amounts to substantially all of the fair value of the leased asset. Capitalization Criteria Three of the four capitalization criteria that apply to lessees are controversial and can be difficult to apply in practice. 1. Transfer of Ownership Test If the lease transfers ownership of the asset to the lessee, it is a finance lease. This criterion is not controversial and easily implemented in practice. 2. Bargain-Purchase Option Test A bargain-purchase option allows the lessee to purchase the leasedproperty for a price that is significantly lower than the propertys expected fair value at the date the option becomes exercisable. At the inception of the lease, the difference between the option price and the expected fair value must be large enough to make exercise of the option reasonably assured. 3. Economic Life Test If the lease period is for a major part of the assets economic life, the lessor transfers most of the risks and rewards of ownership to the lessee. Capitalization is therefore appropriate. However, determining the lease

term and what constitutes the major part of the economic life of the asset can be troublesome. The lease term is generally considered to be the fixed, non-cancelable term of the lease. However, a bargain-renewal option, if provided in the lease agreement, can extend this period. A bargain-renewal option allows the lessee to renew the lease for a rental that is lower than the expected fair rental at the date the option becomes exercisable. Determining estimated economic life can also pose problems, especially if the leased item is a specialized item or has been used for a significant period of time. 4. Recovery of Investment Test If the present value of the minimum lease payments equals or exceeds substantially all of the fair value of the asset, then a lessee should capitalize the leased asset. Determining the present value of the minimum lease payments involves three important concepts: 1. Minimum Lease Payments These payments include the following: a. Minimum rental payments b. Guaranteed residual payments c. Penalty for failure to renew or extend the lease d. Bargain-purchase option 2. Executory Costs Like most assets, leased tangible assets incur insurance, maintenance, and tax expenses-called executory costs-during their economic life. Executory costs do not represent payment on or reduction of the obligation. Many lease agreements specify that the lessee directly pays executory costs to the appropriate third parties. In these cases, the lessor can use the rental payment without adjustment in the present value computation. 3. Discount Rate A lessee, computes the present value of the minimum lease payments using the implicit interest rate. This rate is defined as the 4

discount rate that, at the inception of the lease, causes the aggregate present value of the minimum lease payments and the unguaranteed residual value to be equal to the fair value of the leased asset. Asset and Liability Accounted for Differently Asset and Liability Recorded Under the finance lease method, it records a finance lease as an asset and a liability at either: 1. the present value of the minimum lease payments or 2. the fair value of the leased asset at the inception of the lease. The rationale for this approach is that companies should not record a leased asset for more than its fair value. Depreciation Period If the lease agreement transfers ownership of the asset or contains a bargain-purchase option, the company depreciates the asset consistent with its normal depreciation policy for other asset, using the economic life of the asset. On the other hand, if the lease does not transfer ownership or does not contain a bargain-purchase option, then the company depreciates it over the term of the lease. Effective-Interest Method Throughout the term of the lease, the company uses the effectiveinterest method to allocate each lease payment between principal and interest. Depreciation Concept Although the company computes the amounts initially capitalized as an asset and recorded as an obligation at the same present value, the depreciation of the asset and the discharge of the obligation are independent accounting processes during the term of the lease. C. ACCOUNTING BY THE LESSOR Three important benefits are available to the lessor: 1. Interest revenue Leasing is a form of financing. Banks, captives, and independent leasing companies find leasing attractive because it provides competitive interest margins.

2. Tax incentives In many cases, companies that lease cannot use the tax benefit of the asset, but leasing allows them to transfer such tax benefits to another party (the lessor) in return for a lower rental rate on the leased asset. 3. High residual value Another advantage to the lessor is the return of the property at the end of the lease term. Economics of Leasing A lessor determines the amount of the rental, basing it on the rate of return-the implicit rate-needed to justify leasing the front-end loader. Classification of Leases by the Lessor For accounting purposes, the lessor also classifies leases as operating or finance leases. Finance leases may be further subdivided into directfinancing and sales-type leases. As with lessee accounting, if the lease transfers substantially all the risks and rewards incidental to ownership, the lessor shall classify and account for the arrangement as a finance lease. Lessors evaluate the same criteria. The distinction for the lessor between a direct-financing lease and a sales-type lease is the presence or absence of a manufacturers or dealers profit (or loss): A sales-type lease involves a manufacturers or dealers profit, and a direct-financing lease does not. Normally, sales-type leases arise when manufacturers or dealers use leasing as a means of marketing their products. Lessors classify and account for all leases that do not qualify as directfinancing or sales-type leases as operating leases. Direct-Financing Method (Lessor) Direct-financing leases are in substance the financing of an asset purchase by the lessee. In this type of lease, the lessor records a lease receivable instead of a leased asset. The lease receivable is the present value of the minimum lease payments plus the present value of the unguaranteed residual value.

Thus, the lessor records the residual value, whether guaranteed or not. Also, recall that if the lesssor pays any executory costs, then it should reduce the rental payment by that amount in computing minimum lease payments. D. SPECIAL ACOOUNTING PROBLEMS The features of lease arrangements that cause unique accounting problems are: 1. Residual values In order to develop the basic accounting issues related to lease and lessor accounting, we have generally ignored residual value. The residual value is the estimated fair value of the leased asset at the end of the lease term. 2. Sales-type leases (lessor) When recording sales revenue and cost of goods sold, there is a difference in the accounting for guaranteed and unguaranteed residual values. The guaranteed residual value can be considered part of sales revenue because the lessor knows that the entire asset has been sold. But, there is less certainty that the unguaranteed residual portion of the asset has been sold. Therefore the lessor recognizes sales and cost of goods sold only for the portion of the asset for which realization is assured. However, the gross profit amount on the sale of the asset is the same whether a guaranteed or unguaranteed residual value is involved. 3. Bargain-purchase options If a bargain-purchase option exists, the lessee must increase the present value of the minimum lease payments by the present value of the option price. 4. Initial direct costs Initial direct costs are of two types: incremental and internal. Incremental direct costs are paid to independent third parties for originating a lease arrangement. Internal direct costs are directly related to specified activities performed by the lessor on a given lease. However, initial direct costs should not include internal indirect costs. The accounting for initial direct costs depends on the type of lease: 1. for operating leases 2. for sales-type leases 7

3. for a direct-financing lease

5. Current versus non-current classification IFRS does not indicate how to measure the current and non-current amounts. A common method of measuring the current liability portion in ordinary annuity leases is the change-in-the-present-value method. 6. Disclosure The IASB requires lessees and lessors to disclose certain information about leases. These requirements vary based on upon the type odf lease (financing and operating) and whether the issuer is the lessor or lessee. E. LEASE ACCOUNTING-UNRESOLVED PROBLEMS To avoid leased asset capitalization, companies design, write, and interpret lease agreements to prevent satisfying any of the four finance lease criteria. Companies can easily devise lease agreements in such a way, by meeting the following specifications: 1. Ensure that the lease does not specify the transfer of title of the property to the lessee. 2. Do not write in a bargain-purchase option 3. Set the lease term sufficiently below the estimated economic life of the leased property such that the economic life test is not met. 4. Arrange for the present value of the minimum lease payments to be sufficiently less than the fair value of the leased property. The real challenge lies in disqualifying the lease as a finance lease to the lessee, while having the same lease qualify as a finance lease to the lessor. Unlike lessees, lessors try to avoid having lease arrangements classified as operating leases. Avoiding the first three criteria is relatively simple, but it takes a little ingenuity to avoid the recovery of investment test for the lessee while satisfying it for the lessor. The lessees use of the higher interest rate is probably the more popular subterfuge. The residual value guarantee is the other unique, yet popular, device used by lessees and lessors.