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Lecture Issues in financial accounting – Lecture 28: Accounting for leases

In this chapter students will be able to: Explain the nature, economic substance, and advantages of lease transactions; describe the accounting criteria and procedures for capitalizing leases by the lessee; contrast the operating and capitalization methods of recording leases;. | Accounting for Leases PART III: Decision Tools Lecture 28 Explain the nature, economic substance, and advantages of lease transactions. Describe the accounting criteria and procedures for capitalizing leases by the lessee. Contrast the operating and capitalization methods of recording leases. Identify the classifications of leases for the lessor. Describe the lessor’s accounting for direct-financing leases. Learning Objectives Leasing Environment Who are players? Advantages of leasing Conceptual nature of a lease Accounting by Lessee Accounting by Lessor Special Accounting Problems Capitalization criteria Accounting differences Capital lease method Operating method Comparison Residual values Sales-type leases Bargain-purchase option Initial direct costs Current versus noncurrent Disclosure Unresolved problems Economics of leasing Classification Direct-financing method Operating method Accounting for Leases Largest group of leased equipment involves: Information technology . | Accounting for Leases PART III: Decision Tools Lecture 28 Explain the nature, economic substance, and advantages of lease transactions. Describe the accounting criteria and procedures for capitalizing leases by the lessee. Contrast the operating and capitalization methods of recording leases. Identify the classifications of leases for the lessor. Describe the lessor’s accounting for direct-financing leases. Learning Objectives Leasing Environment Who are players? Advantages of leasing Conceptual nature of a lease Accounting by Lessee Accounting by Lessor Special Accounting Problems Capitalization criteria Accounting differences Capital lease method Operating method Comparison Residual values Sales-type leases Bargain-purchase option Initial direct costs Current versus noncurrent Disclosure Unresolved problems Economics of leasing Classification Direct-financing method Operating method Accounting for Leases Largest group of leased equipment involves: Information technology Transportation (trucks, aircraft, rail) Construction Agriculture LO 1 Explain the nature, economic substance, and advantages of lease transactions. A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time. The Leasing Environment Banks LO 1 Who Are the Players? The Leasing Environment Captive Leasing Independents Wells Fargo Chase Citigroup PNC Caterpillar Financial Services Corp. Ford Motor Credit (Ford) IBM Global Financing Market Share 47% 23% 26% 100% financing at fixed rates. Protection against obsolescence. Flexibility. Less costly financing. Tax advantages. Off-balance-sheet financing. The Leasing Environment LO 1 Explain the nature, economic substance, and advantages of lease transactions. Advantages of Leasing Capitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is noncancelable. The Leasing Environment LO