Leases: Lessors—Classification explains and analyzes the accounting classification of leases from the lessor's perspective. The Portfolio discusses in detail the classification tests found in FASB Statement No. 13, Accounting for Leases.
This Portfolio, written by Joseph P. Sebik, C.P.A. and Lisa Marie Starczewski, Esq., analyzes the definitions of terms relevant to classification, with specific emphasis on the calculation of minimum lease payments.
When a business arrangement includes the providing of an asset, it is necessary to determine if the arrangement contains a lease or itself is a lease and, thus, is within the scope of FASB Statement No. 13, Accounting for Leases (FAS 13).
If part (or all) of the arrangement is within the scope of FAS 13, then that portion of the arrangement is considered a “lease” and must be classified by applying the lease classification tests. Any portion not considered a lease is accounted for by applying other relevant U.S. GAAP.
This Portfolio includes a detailed discussion and analysis of the lease classification tests from the lessor's perspective. It analyzes each of the classification tests found in FAS 13. Leases: Lessors—Classification explains key definitions and discusses the impact of those definitions on the lease classification tests.
This Portfolio is the fifth in a subseries of portfolios on accounting for leases. This work augments BNA Tax and Accounting Portfolio 5114, Accounting for Leases: Fundamental Principles (Accounting Policy and Practice Series).
Leases: Lessors—Classification allows you to benefit from:
This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more.
Detailed Analysis
I. Lease Classification-Lessors
A. Introduction and Scope of Portfolio
B. Derivation of Lease Classification Guidelines
C. General Classification Guidelines-Equipment (Assets Other Than Real Estate)
D. Equipment Assets-Detailed Classification Analysis
1. Collectibility of Lease Receivables and Certainty of Unreimbursable Costs (FAS 13, ¶ 8)
a. The General Tests
b. Interpretation of "Reasonably Predictable"
(i) Allowance for Bad Debts
(ii) Lessee in Bankruptcy
(iii) Credit Ratings of Lessees' Debt
c. Uncertainties Regarding Unreimbursable Costs
2. Classification Tests (FAS 13, ¶ 7)
a. Automatic Title Transfer Test-¶ 7(a)
b. Bargain Purchase Option Tests-¶ 7(b)
c. Lease Term Test-¶ 7(c)
d. 90% Present Value Test-¶ 7(d)
(i) In General
(ii) Components of 90% Present Value Test
(iii) Application of the 90% Present Value Test When Lessee Options Exist
3. Sales-Type Lease Classification for Equipment (FAS 13, ¶ 6)
4. Leveraged Lease Classification Criteria (FAS 13, ¶ 42)
II. Inception of a Lease
Introductory Material
A. General Definition
B. Inception of the Lease in Contrast to Asset Recording Date
C. Inception Date in Build-to-Suit Lease Transactions
D. Inception Date Under a Master Lease Agreement
1. Background
2. Determination of Inception Date Under an MLA
3. Master Leases Used to Aggregate Assets Under a Single Lease
III. Minimum Lease Payments
A. General Definition of Minimum Lease Payments
B. Lowest-Cost Concept
C. Contingent Rentals
1. Interim Rents
a. In General
b. Treatment of Interim Rents Under Certain Master Lease Agreements
2. Excess Wear and Tear
3. Treatment of Changes in Indexed Underlying Borrowing Costs
4. Charges Resulting From Excess Usage Above a Baseline Allowable Usage
5. Contingent Rents Based on a Certain Event
6. Rents Based Solely on Usage
D. Treatment of Loans That Are Non-Recourse to Both Lessee and Lessor
E. Lessee Guarantee of Lessor's Debt
F. Lessee Loans to Special Purpose Entities Holding a Lease
G. Lessee Executory Costs
H. Residual Value Guarantees
I. Lease Renewal Guarantees
J. Lease Termination Fees
K. Imputed Interest Income From Security Deposits
L. Lessor Transaction and Administrative Fees Paid by Lessee
M. Payments Received Prior to the Commencement of the Lease
N. Imputed Value of a Purchase Option Transferred to Lessor
O. Excessive Asset Return and Remarketing Costs to Be Paid by or Incurred by the Lessee
P. Lessor's Right to Utilize Property Without Payment of Adequate Consideration
Q. Lessee Commitment to Arrange Subsequent Financing or Acquire Leased Asset If Lease Debt Is Not Refinanced
R. Investments Made or Committed to Be Made by Lessee in the Lessor at or Near the Inception of the Lease
S. Lessee Loans to the Lessor That Remain Outstanding at the Expiration of the Lease
T. Treatment of Executory Costs Associated With a Lease
U. Make-Whole Premiums on Non-Renewals or Early Terminations
V. Payments to Be Made Under Non-Performance-Related Default Covenants
W. Lessee Indemnification of Pre-existing Environmental Contaminations
X. Lessee Requirement to Fund Upgrades or Improvements to Assets
Y. Asset Retirement Obligations Under FAS 143
IV. Definitional Issues That May Impact Classification
A. Related Parties
1. General Definition
2. Classifying Leases Between Related Parties
3. Related Parties in Leveraged Lease Transactions
B. Fair Value of the Leased Property
1. Basic Definition
2. Ensuring Related Parties Acquire Assets at Fair Value
3. Determining Fair Value for Certain Sale-Leasebacks of Equipment
4. Effect of Miscellaneous Costs on Fair Value
5. Effect of Lessor's Volume or Trade Discounts on Fair Value
6. Fair Value Greater Than Contracted Cost
7. Determining Fair Value on Existing Assets Already Under Lease
8. Effect of Asset Retirement Obligations on Minimum Lease Payment and Fair Values
C. Bargain Purchase Option
D. Bargain Renewal Option
E. Lease Term
1. Noncancelable Nature of a Lease
a. Remote Contingency
b. Permission to Cancel
c. New Lease
d. Penalty for Cancellation
2. Periods Included in the Term of a Lease
a. Bargain Renewal Option
b. Penalty Imposed for Failure to Renew
c. Lessee Expected to Guarantee the Debt
d. Purchase Option
F. Estimated Economic Life of Leased Property
G. Estimated Residual Value of Leased Property
2. Retail Fair Market Residual Value
3. Wholesale Fair Market Residual Value
4. Orderly Liquidation Residual Value
5. Distressed Value
6. Selecting a Residual Value Method
H. Unguaranteed Residual Value
2. TRAC Lease Residual Value Guarantees
3. Lessee Residual Value Guarantees in Synthetic Leases
I. Interest Rate Implicit in the Lease
2. Effect of Tax Leases on Implicit Interest Rates
3. Effect of Investment Tax Credit on Implicit Interest Rate
J. Determining Lessee's Incremental Borrowing Rate
K. Initial Direct Costs
2. Definition-FAS 91
3. Fees Received by Lessor
a. Initial Direct Costs
b. Commitment Fees
c. Syndication Fees
d. Underwriting Fees
4. Exclusion of Loss Allowance From Initial Direct Costs
5. Initial Direct Costs Associated With Acquiring a Portfolio of Leases
L. Penalties
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 Glossary
Worksheet 2 Lease Classification Flowchart
Worksheet 3 Comparison of Projected Value and Lease Balance
Bibliography
OFFICIAL
Internal Revenue Service
Financial Accounting Standards Board
FASB Statements
FASB Interpretations
FASB Emerging Issues Task Force (EITF) Consensus Positions
APB Opinions
American Institute of Certified Public Accountants
AICPA Auditing Standards
AICPA Issues Papers
UNOFFICIAL
Speeches
BNA Portfolios