PORTFOLIO

Leases: Lessor Perspective—Recording the Lease (Portfolio 5129)

BNA Tax and Accounting Portfolio 5129, Leases: Lessor Perspective–Recording the Lease (Accounting Policy & Practice Series) explains, analyzes and illustrates the recording of leases from the lessor's perspective.

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DESCRIPTION

BNA Tax and Accounting Portfolio 5129, Leases: Lessor Perspective–Recording the Lease (Accounting Policy & Practice Series) explains, analyzes and illustrates the recording of leases from the lessor's perspective. The Portfolio also discusses the disclosure requirements relevant to leases.
The Portfolio explains and illustrates in detail how a lessor should record a sales-type lease, a direct financing lease, an operating lease and a leveraged lease. The sixth in a subseries of Portfolios on accounting for leases, this work augments APP 5114, Accounting for Leases: Fundamental Principles; APP 5120-2nd, Leases: Lessor Perspective - Economics; and APP 5128, Leases: Lessor Perspective - Classification.
The FASB and the International Accounting Standards Board (IASB) are collaborating to revise and converge their standards on Accounting for Leases. This Portfolio will be updated as necessary to reflect any new rules or principles. For a summary of the most recently proposed rules and their potential impact on lessor accounting, see APP 5114, Accounting for Leases: Fundamental Principles at Section I.D.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5129, Sebik and Starczewski, Leases: Lessor Perspective - Recording the Lease (Accounting Policy and Practice Series).


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AUTHORS

JOSEPH P. SEBIK, C.P.A.
Joseph P. Sebik, B.A., Accounting, Queens College of the City University of New York (1977); graduate credits towards MBA, Controllership, St. Johns University; Certified Public Accountant, New York State (1980); member of the Accounting Committee of the Equipment Leasing & Finance Association (ELFA) since 2000; recurring speaker at ELFA Accounting Conferences; author of numerous articles on leasing; member AICPA; over 20 years of lease accounting and financial reporting experience with Price Waterhouse; IBM Credit Corporation, Citicorp Global Equipment Finance, and JPMorgan Capital; Co-Author BNA Tax and Accounting Portfolios 5114, Accounting for Leases: Fundamental Principles; 5117, Leases: Lessee Perspective, 5118, Leases: Lessee Perspective – Selected Topics; 5120, Leases: Lessor Perspective – Economics and 5128, Leases: Lessors – Classification.

LISA MARIE STARCZEWSKI, ESQ.
Lisa Marie Starczewski, B.A., Smith College (magna cum laude, 1985); Villanova University School of Law, J.D. (summa cum laude, 1988); former associate, Morgan, Lewis & Bockius; Schnader, Harrison, Segal & Lewis; Editor-in-Chief, Villanova Law Review (1987-88); member of adjunct faculty, Villanova University School of Law; Author, 714 T.M., Partnerships – Allocation of Liabilities; Basis Rules; 550 T.M., At-Risk Rules; 565 T.M., Installment Sales; 752 T.M., Corporate Alternative Minimum Tax; 587 T.M., Noncorporate Alternative Minimum Tax; 621 T.M., IRS National Office Procedures – Rulings, Closing Agreements; Co-Author, 517 T.M., Scholarships and Educational Expenses; 503 T.M., Deductions: Overview and Conceptual Aspects; and 504 T.M., Deduction Limitations: General; author of several chapters in the Tax Practice Series and contributor to various tax publications; recipient of Distinguished Author award; Member, Tax Management U.S. Income Advisory Board; Co-Author BNA Tax and Accounting Portfolios 5100, Revenue Recognition: Fundamental Principles, 5101, Revenue Recognition: Product Sales and Services, 5114, Accounting for Leases: Fundamental Principles;5117, Leases: Lessee Perspective, 5118, Leases: Lessee Perspective – Selected Topics, 5120, Leases: Lessor Perspective – Economics and 5128, Leases: Lessors – Classification.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction and Scope of Portfolio

A. Effect of FAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140

B. Other Issues

II. Recording a Sales-Type Lease

A. Criteria for Classification as a Sales-Type Lease

B. Accounting for the Financing Portion

C. Accounting for the Sales Portion

D. Entry to Record the Sales-Type Lease

E. Accounting for Future Executory Costs Included in the Lease Payments

F. Captive Leasing Companies and Sales-Type Leases

G. Classification of a Renewal or Extension of an Existing Lease as a Sales-Type Lease

H. Effect of Investment Tax Credit on a Sales-Type Lease

1. Background

2. Discussion

I. Lease Renewals or Extensions Resulting From Equipment Upgrades During the Lease Term

J. Effect of Fair Value Subjectivity on Certain Sales-Type Leases

K. Sales-Type Lease With a Bargain Purchase Option

L. Determining How to Record a Lease When Multiple Lease Options Exist

III. Recording a Direct-Finance Lease

A. Background

B. Initial Direct Costs

C. Treatment of Syndication or Underwriting Fees When a Portion of a Direct-Finance Lease Is Retained

IV. Issues Applicable to Both Sales-Type Leases and Direct-Finance Leases

A. In General

B. Effect of a Permanent Decline in the Residual Value Estimate

C. Limitations Affecting the Evaluation of Residual Values

1. In General

2. Limitation of Forecasted Renewals on Setting Residual Values

3. Limitation on Accounting for Any Upward Adjustment of Residual Value

4. Limitation on Recording Residual Values in Excess of Asset's Fair Value

D. Sales or Participations of Lease Receivables

1. Background

2. Direct Sale Versus Participation

3. Use of the Term "Assignment" When Describing a Sale of a Lease

4. Basis of Accounting for the Sale or Assignment of a Lease

a. Non-Tax Leases

b. Tax-Oriented Leases

5. Basis of Accounting for the Sale or Assignment of a Lease Receivable

a. Legal Isolation

b. Right to Pledge the Asset

c. No Effective Control by the Seller

d. Conclusion

6. Limitation on Finance Income Recognition for Lease Receivables Sold

7. Lessor's Retained Interests in the EBOs of Tax Leases Sold

8. Income Recognition Issues When Selling Floating Rate Leases

9. Examples

E. Accounting for Floating Rate Leases

F. Use of a Titling Trust for Sales or Assignments of Certain Leased Assets

G. Accounting for a Purchase of an Existing Lease or Portfolio of Leases

H. Early Termination of a Lease by a Lessee and Subsequent Re-Lease

I. Sales of Residual Interests Prior to Lease Termination

J. Sale or Pledge of Finance Lease Receivables (Without Recourse) - Proceeds Exceed Cost (Money-Over-Money Transactions)

1. Overview of Transaction

2. Transaction Documented as Sale of Receivables

3. Transaction Documented as a Non-Recourse Borrowing

K. Revenue Recognition on Sales With a Guaranteed Minimum Resale Value Associated With a Financing-Type of Lease

V. Recording an Operating Lease

A. Background

B. Accounting for an Operating Lease

C. Real Estate Exception

D. Recording the Operating Lease

1. Basic Operating Lease

2. Operating Lease With Skipped or Uneven Rent Payments

3. Real Estate "Sales-Type Lease" Classified as an Operating Lease - Carrying Value Is Less Than Fair Value

4. Real Estate "Sales-Type Lease" Classified as an Operating Lease - Carrying Value Is More Than Fair Value

5. Treatment of Certain Contingent Rents Under Operating Leases

6. Sale of Operating Lease Receivables - Without Recourse

7. Sale of Operating Lease Receivables (Without Recourse) - Proceeds Exceed Cost (Money-Over-Money Transactions)

8. Sale of an Asset Subject to an Operating Lease With Seller Retaining Substantial Risks of Ownership

9. Revenue Recognition on Assets Sold (to Dealers), Repurchased and Placed Into an Operating Lease

VI. Accounting for the Acquisition of a Residual Interest

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Example of Finance Income Recognition

Worksheet 2 Extracts From IBM's 2007 Annual Report

Worksheet 3 Extracts From Xerox Corporation's 2007 Annual Report

Worksheet 4 Amortization of Lease Not at or Near End of Lease Terms

Worksheet 5 Allocation of Initial Direct Costs