Lease Accounting, Made Simple. Interactive Lease Accounting Simulation

Interactive Lease Accounting Simulation

Lease Classification Lease Scenarios Sale-Leaseback Disclosure Requirements

Lease Accounting, Made Simple.

This simulation is designed to help you intuitively understand lessor accounting standards.
Explore complex classification criteria through interactive tools and visually confirm accounting treatment results for various scenarios.

Lease Classification Simulator

Answer the questions below to see how lease types are determined. Meeting any one of the OWNES criteria results in a sales-type lease.

1. Does ownership of the underlying asset transfer to the lessee by the end of the lease term? (Ownership)

Yes No

2. Does the lease grant the lessee an option to purchase the asset, and is exercise of that option reasonably certain? (Written Option)

Yes No

3. Is the present value of the sum of the lease payments substantially all (e.g., 90% or more) of the fair value of the asset? (Net Present Value)

Yes No

4. Is the lease term for a major part (e.g., 75% or more) of the remaining economic life of the asset? (Economic Life)

Yes No

5. Is the asset of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term? (Specialized)

Yes No

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OWNES criteria not met. Now checking PC criteria for direct financing lease.

6. Is the present value of the sum of the lease payments and any residual value guarantee equal to or substantially exceed the fair value of the asset? (Present Value)

Yes No

7. Is the collection of the lease payments and any residual value guarantee probable? (Collection)

Yes No

Classification Result:

Lease Type Scenario Analysis

Compare how accounting treatment differs for each lease type through specific examples.

This occurs when control of the asset is transferred to the lessee. The lessor derecognizes the asset and recognizes a profit (or loss) on sale and interest income at lease commencement. It is treated as a substantive sale of the asset.

Key Accounting Treatment

• Initial Recognition: Derecognize the underlying asset from the balance sheet and recognize a net investment in the lease.
• Profit/Loss: Recognize a profit or loss on sale immediately at lease commencement.
• Initial Direct Costs: Expensed immediately if profit is recognized; deferred if no profit.
• Interest Income: Recognized over the period using the effective interest method.

Example: Journal Entry

Account	Debit	Credit
Lease Receivable	$24,216
Lease Expense	$450
Profit		$2,216
Truck (Asset)		$22,000
Cash		$450

Amortization Schedule Visualization

Control of the asset is not transferred, but collection of lease payments is probable, and the present value substantially equals the asset's fair value. The lessor defers any selling profit and recognizes it as part of interest income over the lease term.

Key Accounting Treatment

• Initial Recognition: Derecognize the underlying asset and recognize a net investment in the lease.
• Profit/Loss: Selling profit is deferred and amortized over the lease term. Losses are recognized immediately.
• Initial Direct Costs: Deferred and amortized over the lease term.
• Interest Income: Recognized using the effective interest method, adjusted to include deferred profit.

Example: Journal Entry (Commencement)

Account	Debit	Credit
Lease Receivable (net)	$22,000
Truck (Asset)		$22,000

Amortization Schedule Visualization

This is any lease that is not a sales-type or direct financing lease. The lessor retains ownership of the asset, recognizes lease payments received as rental income, and continues to depreciate the asset. It is similar to a traditional rental agreement.

Key Accounting Treatment

• Asset: Continues to recognize the underlying asset on the balance sheet.
• Depreciation: Continues to depreciate the asset over its useful life.
• Revenue Recognition: Recognizes lease payments received as rental income on a straight-line basis or another systematic basis over the lease term.
• Initial Direct Costs: Deferred and expensed over the lease term.

Example: Journal Entries

To record cash received and rental income

Account	Debit	Credit
Cash	$XXX
Rental Revenue		$XXX

To record depreciation

Account	Debit	Credit
Depreciation Expense	$XXX
Accumulated Depreciation		$XXX

Sale-Leaseback Transactions

Compare the accounting treatment when an asset is sold and then leased back. The essence of the transaction – whether it's a 'sale' or 'financing' – is key.

When Sale Criteria Are Met

This is when the transaction qualifies as a true 'sale'. The seller derecognizes the asset and recognizes profit or loss on sale, while simultaneously recognizing a right-of-use asset and lease liability from the leaseback agreement. Differences between sale price and fair value are adjusted as additional financing or prepaid lease payments.

Example Journal Entry (Asset Transfer)

Account	Debit	Credit
Cash	$490,000
Accumulated Depreciation	$85,000
Equipment		$500,000
Financing Liability		$20,000
Gain on Sale of Equipment		$55,000

When Sale Criteria Are Not Met (Financing Transaction)

This occurs when the transaction does not qualify as a 'sale'. The seller does not derecognize the asset and accounts for the cash received as a collateralized borrowing (financing liability). Depreciation on the asset continues.

Example Journal Entry (Commencement)

Account	Debit	Credit
Cash	$490,000
Financing Liability		$490,000

Financial Statement Disclosure Requirements

Lessors must disclose sufficient information to allow users of financial statements to understand the nature of their leasing activities.

Qualitative Disclosures

• ✓Description of the lease
• ✓Existence and terms/conditions of options to extend or terminate the lease
• ✓Options for the lessee to purchase the leased asset
• ✓Significant assumptions and judgments (including whether a contract contains a lease and the allocation of consideration between lease and nonlease components)
• ✓Related party leases (if applicable)
• ✓Accounting policies on lessor accounting

Quantitative Disclosures

• ✓Profit or loss recognized at commencement date
• ✓Interest income
• ✓Income related to operating lease payments received
• ✓Income from variable lease payments not included in the measurement of the lease receivable
• ✓Components of the net investment in sales-type and direct financing leases
• ✓Information on assets that are subject to operating leases (including associated depreciation and impairment)
• ✓Separate maturity analysis of lease receivables, showing undiscounted cash flows for a minimum of each of the first five years and a total for remaining years

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