leases

• “A contract is, or contains, a lease if the contract

  conveys the right to control the use of an

  identified asset for a period of time in exchange

  for consideration.”
• A customer does not have the right to use an identified asset if the

  supplier has the substantive right to substitute the asset throughout

  the period of use.
• Lessee recognizes both:

  1. Lease liability; and

  2. Right-of-use asset
• Lessee recognizes lease payments as expense over the lease term

  using straight line basis, or another more appropriate basis.
• Discount rate is the interest rate implicit in the lease; if not

  determinable, then the lessee’s incremental borrowing rate.
• Finance lease - a lease that transfers

  substantially all the risks and rewards

  incidental to ownership of an asset. Title may or

  may not eventually be transferred.
• Operating lease - a lease other than a finance

  lease.
• Lessors recognize assets from a finance lease as receivable measured

  at an amount equal to the net investment in the lease.
• Gross Investment – This is equal to the gross rentals for

  the entire lease term plus the absolute amount of the residual

  value, whether guaranteed or unguaranteed.
• Unearned Interest Income – This is the difference

  between the gross investment and net investment.
• Unearned Interest Income – This is the difference

  between the gross investment and net investment.
• Net Investment in the lease – This is equal to the cost of

  the asset plus any initial direct cost paid by the lessor.
• Initial direct costs are capitalized except direct costs incurred by a

  manufacturer or dealer lessor under a sales type lease, which are

  expensed immediately.
• The interest rate implicit in the lease is defined in such a way that

  the initial direct costs are included automatically in the net

  investment in the lease; there is no need to add them separately.
• Gross Profit – Sales minus Cost of Good Sold.
• Intraperiod tax allocation relates to the allocation of income tax

  expense during the period to various items of income or other sources

  that brought about the tax. This is based on the notion – “the tax

  follows the income.” Income tax is allocated to the following:
• Interperiod tax allocation relates to the recognition of deferred tax

  assets and deferred tax liabilities. It is concerned with the accounting

  for temporary differences.