| Classification Mnemonic for Leases | OWNES PC
O= Ownership Transfer
W= Written Purchase Option
N= Net Present Value + Residual Value >= 90% of Asset's FV
E= Economic Life >= 75%
S= Specialized (No Alt) Use
P= PV Sum of Lease Payments (excl. res value) >= Asset's FV
C= Collection of Payments is Probable |
| How would the Lessee see the lease as a Finance lease? | Meets 1+ of OWNES |
| How many expenses are recorded for Lessees in a Finance Lease? | 2; Interest Expense and Amortization |
| How would the Lessee see the lease as an Operating Lease? | Meets none of OWNES |
| How many expenses are recorded for Lessees in an Operating Lease? | 1; Lease Expense |
| How would the Lessor see the lease as an Operating Lease? | One or no portion of PC |
| What does the Lessor account for during an Operating Lease? | They keep the asset on their books and depreciate it |
| How would the Lessor see the lease as a Sales-Type Lease? | 1+ OWNES, but not both PC |
| How would the Lessor see the lease as a Direct-Financing Lease? | 1+ OWNES, both PC |
| What does the Lessor account for during an Sales-Type Lease? | Remove the Asset, Recognize Lease Receivable |
| What does the Lessor account for during an Direct-Financing Lease? | Remove the Asset, Recognize Lease Receivable |
| When does the lease term begin? | At commencement date, this means that even if there is no rent being paid, the lessor will still book rent revenue and receivable. |
| What discount rate should be used? Implicit or Incremental Borrowing Rate? | Use lessor's implicit rate if known by the lessee, if not, use incremental borrowing rate. |
| If control HAS transferred in a Sale-Leaseback, how should it be treated? | Operating Leaseback (Sale), transaction should be at FV and P/L should be recognized. |
| If control HAS NOT transferred in a Sale-Leaseback, how should it be treated? | Financing Leaseback (Failed Sale); Seller (Lessee) recognizes financing liability and Buyer (Lessor) recognizes a financing receivable |
| How should depreciation be calculated in leases? | *(CV of Payments and Residual - Residual Value)/Number of Years (least if N or E in OWNES)
CV = PV of both Annual Payments (PV Factor x Annual Payments) + PV of Residual (PV Factor x Residual) |
| How should interest expense be calculated in leases? | CV of Payments and Residual x Implicit Rate |
| How should interest liability be calculated in leases? | CV of Payments and Residual - (Annual Payment - Interest Expense) |
