FINANCIAL STATEMENT ANALYSIS CASE
($ millions)
(b) The total rental expense for Walmart in fiscal 2011 (ending 1/31/2012)
was $2.4 billion.
(c) To estimate the present value of the operating leases, the same portion
FINANCIAL STATEMENT ANALYSIS CASE (Continued)
Total operating lease payments due ………………………….. $16,415
Less estimated interest …………………………………………….. 7,108
Estimated present value of net operating
lease payments …………………………..………………………… $9,307
This answer is an approximation. This answer is somewhat incorrect
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
There are four lease capitalization criteria. They are (1) transfer of title,
(2) bargain-purchase option, (3) the lease term is 75% or more of the
economic life of the leased asset, and (4) the present value of the minimum
lease payments is 90% or more of the leased asset’s fair value.
This lease does not transfer title. The option to purchase at the end of the
lease is clearly not a bargain. The lease term is (3 ÷ 5) = 0.6 or 60% of the
economic life, so the economic life test is not met. The recovery of
investment test is as follows:
Minimum lease payments
Therefore, the recovery of investment test is not met either. Consequently,
this lease is accounted for as an operating lease. Therefore the journal
entry that Salaur makes on January 1, 2014 is:
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
When companies structure leases to avoid capitalization, both the leased
assets and the obligation for the noncancelable lease payments are “off–
Principles
The element of the fundamental quality is faithful representation. The lease
criteria are designed to report leases according to their economic
PROFESSIONAL RESEARCH
(a) According to FASB ASC 840-10–10-1 the objective of the lease
classification criteria in this Subtopic derives from the concept that a
(b) According to the Glossary at FASB ASC 840–10–20, “substantially all”
relates to the concepts underlying the lease classification criteria. A 90
percent recovery test in the minimum-lease-payments criterion in
(c) Lease Term (Codification String: Broad Transactions > 840 Leases > 10
Overall > 20 Glossary)
The lease term is the fixed noncancelable lease term plus all of the
following, except as noted in the following paragraph:
a. All periods, if any, covered by bargain renewal options.
PROFESSIONAL RESEARCH (Continued)
(2) A loan from the lessee to the lessor directly or indirectly related
to the leased property is expected to be outstanding.
(d) According to FASB ASC 840–10–25-9, a lease provision requiring the
lessee to make up a residual value deficiency that is attributable to
PROFESSIONAL SIMULATION 1
Note: This assignment is available on the Kieso website.
Resources
Note: This lease is a capital lease to the lessee because the lease term
(six years) exceeds 75% of the economic life of the asset (six years). Also, the
PROFESSIONAL SIMULATION 1 (Continued)
Journal Entries
January 1, 2014
Leased Equipment ………………………………………………… 400,000
Lease Liability ………………………………………………… 400,000
Depreciation Expense ……………………………………………. 58,333
Accumulated Depreciation—Capital
Leases ([$400,000 – $50,000] ÷ 6) …………………. 58,333
January 1, 2015
Interest Payable …………………………………………………….. 38,236
Interest Expense …………………………………………….. 38,236
PROFESSIONAL SIMULATION 1 (Continued)
(Note to instructor: The guaranteed residual value was subtracted for
purposes of determining the depreciable base. The reason is that at the
end of the lease term, hopefully, this balance can offset the remaining lease
PROFESSIONAL SIMULATION 2
Explanation
This is a capital lease to Dexter Labs since the lease term (5 years) is
Measurement
Computation of present value of minimum lease payments:
Journal Entries
1/1/14 Leased Equipment ………………………………….. 36,144
Lease Liability ………………………………….. 36,144
IFRS CONCEPTS AND APPLICATION
IFRS21-1
The IFRS leasing standard is IAS 17, first issued in 1982. This standard is
IFRS21-2
Both U.S. GAAP and IFRS share the same objective of recording leases by
IFRS21-3
Lease accounting is one of the areas identified in the IASB/FASB
Memorandum of Understanding and also a topic recommended by the SEC
IFRS21-4
Under the operating method, rent expense (and a compensating liability)
accrues day by day to the lessee as the property is used. The lessee
IFRS21-5
Under the finance lease method, the lessee treats the lease transactions as
if the asset were being purchased on an installment basis: a financial
transaction in which an asset is acquired and an obligation is created. The
asset and the obligation are stated in the lessee’s balance sheet at the
IFRS21-6
From the standpoint of the lessor, leases may be classified for accounting
purposes as: (a) operating leases, (b) direct-financing leases, and (c) sales-
type leases.
Leases are classified as finance leases if they meet one or more of the
following four criteria:
1. The lease transfers ownership of the property to the lessee,
IFRS21-7
Interest Expense …………………………..………………………. 29,530
IFRS21-8
Interest Payable [($300,000 – $53,920) X 12%] ………… 29,530
IFRS21-9
(a) To Brecker, the lessee, this lease is a finance lease because the terms
satisfy the following criteria:
1. The lease term is for the major portion (greater than 75%) of the
(b) The minimum lease payments in the case of a guaranteed residual
value by the lessee include the guaranteed residual value. The present
IFRS21-9 (Continued)
(d) Depreciation Expense ……………………………………….. 187
IFRS21-10
(a) The lease agreement has a bargain-purchase option and thus meets
the criteria to be classified as a finance lease from the viewpoint of the
(c) Computation of lease liability:
$18,829.49 Annual rental payment
X 4.16986 PV of an annuity-due of 1 for n = 5, i = 10%
$78,516.34 PV of periodic rental payments
IFRS21-10 (Continued)
GILL COMPANY (Lessee)
Lease Amortization Schedule
Annual Lease
Payment Plus
BPO
Interest
(10%) on
Liability
Reduction
of Lease
Liability
Lease
Liability
$81,000.00
$18,829.49
$ –0–
$18,829.49
62,170.51
18,829.49
6,217.05
12,612.44
49,558.07
35,684.39
20,423.34
18,829.49
16,787.16
3,636.18
4,000.00
3,636.18
$98,147.45
$81,000.00
(d) 5/1/14 Leased Equipment ……………………….. 81,000.00
Lease Liability ……………………….. 81,000.00
1/1/15 Interest Payable ……………………………. 4,144.70
Interest Expense ……………………. 4,144.70
IFRS21-10 (Continued)
12/31/15 Interest Expense ……………………….. 3,303.87
Interest Payable ………………….. 3,303.87
($4,955.81 X 8/12 =
($3,303.87)
IFRS21-11
Note: The lease agreement has a bargain-purchase option. The lease,
therefore, qualifies as a finance lease from the viewpoint of the lessor.
(a) The lease receivable is computed as follows:
$18,829.49 Annual rental payment
X 4.16986 PV of an annuity-due of 1 for n = 5, i = 10%
$78,516.34 PV of periodic rental payments
IFRS21-11 (Continued)
(b) LENNOX LEASING COMPANY (Lessor)
Lease Amortization Schedule
Annual Lease
Payment Plus
BPO
Interest (10%)
on Lease
Receivable
Recovery
of Lease
Receivable
Lease
Receivable
$81,000.00
$18,829.49
$18,829.49
62,170.51
18,829.49
$ 6,217.05
12,612.44
49,558.07
35,684.39
20,423.34
18,829.49
16,787.16
4,000.00
3,636.18
$98,147.45
$81,000.00
(c) 5/1/14 Lease Receivable …………………. 81,000.00
Cost of Goods Sold ………………. 65,000.00
Sales Revenue ………………. 81,000.00
Inventory ………………………. 65,000.00
IFRS21-11 (Continued)
5/1/15 Cash ……………………………………. 18,829.49
Lease Receivable ………….. 12,612.44
Interest Receivable ………… 4,144.70
Interest Revenue …………… 2,072.35
($6,217.05 – $4,144.70)
IFRS21-12
(a) According to IAS 17, paragraph 7, “The classification of leases adopted
in this Standard is based on the extent to which risks and rewards
incidental to ownership of a leased asset lie with the lessor or the
lessee. Risks include the possibilities of losses from idle capacity or
IFRS21-12 (Continued)
(b) IAS 17 does not define “substantially all.”
(c) IAS 17 does not name other considerations in determining “lease term,”
IFRS21-13
(a) M&S uses both finance leases and operating leases.
(c) M&S disclosed future minimum rentals (in millions) under non-cancelable
operating lease agreements as of 31 March 2012, of:
Not later than one year ……………………………… £ 257.8