9. Accounting and Reporting by the Lessor

h. determine the initial recognition, initial measurement, and subsequent measurement of finance leases;

## i. compare the disclosures relating to finance and operating leases;

Under IFRS what is a “finance lease”? Under IFRS, leases are classified as finance leases when substantially all the risks and rewards of legal ownership are transferred to the lessee.

What are the two revenue recognition criteria for a lease to be capitalized? Leases not meeting these two criteria must be reported as operating leases. - Collectability of the minimum lease payments is reasonably predictable. - There are no uncertainties regarding the amount of unreimbursable cost yet to be incurred by the lessor.

Under US GAAP, what are the two types of capital leases when dealing with lessors? 1. Sales-Type Lease 2. Direct Financing Lease

What is a sale-leaseback (S-L) transaction? At the inception of the lease, a manufacturer treats the transaction as if it sold the asset in exchange for an investment in a capital lease. It recognizes a gross profit from the sale of the asset. Called Sale-leaseback (S-L)

What is a direct financing lease? In a direct financing lease, a leasing company purchases a property from a manufacturer and then leases the equipment to the lessee.

What is the distinction between a sales-type lease and a direct financing lease? The distinction between a sales-type lease and a direct financing lease is the presence/absence of a manufacturer’s or dealer’s profit. In a direct financing lease, the cost of the leased asset equals its market value, so only financing income is involved. In a sales-type lease, the cost of the leased asset is less than its market value (the present market value of lease payments), creating a manufacturer’s or dealer’s profit in addition to financing income.

What is the effect of an operating lease on a lessors balance sheet? The book value of the asset is reported on the balance sheet as a long-term asset, net of accumulated depreciation.

What is the effect of a capital lease on a lessors balance sheet? Lease receivable, instead of the asset, is reported on the balance sheet, and is amortized over the life of the lease.

What is the effect of an operating lease on a lessors income statement? At the inception of the lease, no income is recognized. Over the life of the lease, income tends to be constant if straight-line depreciation is used.

What is the effect of a capital lease on a lessors income statement? Over the life of the lease, interest income tends to decline over time.

What is the effect of an operating lease on a lessors cash flow statement? At the inception of the lease, no cash flow occurs. Over the term of the lease, the entire lease payment is reported as an operating cash inflow.

What is the effect of a capital lease on a lessors cash flow statement? Over the term of the lease, the lease payment from the lessee is allocated to interest income (an operating cash inflow under U.S. GAAP, and either an operating or an investing cash flow under IFRS) and net investment recovery (investing inflow).