Lease classification for lessee including interest rate determination example. Example 2 solution: Part I – Based on the information presented below, RRI would classify the BAC lease as an operating lease under US GAAP and a finance lease under IFRS. US GAAP capitalization criteria. IFRS capitalization criteria. US GAAP. IFRS. Ownership is transferred to the lessee by the end of the lease term. Similar. No. The lease contains a BPO. No. 12,000 > 5,124. No. 12,000 > 5,124. The lease term is equal to 75% or more of the estimated economic life of the leased property. The lease term is a major part of the estimated economic life of the leased property. No. Seven years = 70% of 10 years. No. Seven years = 70% of 10 years. Might or might not be considered a major part. The PV of MLP equals or exceeds 90% of the fair value of the leased property. The PV of MLP is substantially all of the fair value of the leased property. 17,359 = 87% of 20,000. Yes. 17,359 = 87% of 20,000 Might or might not be considered substantially all. (Continued on next slide.)
Lessees will be required to: Recognize right-of-use asset as well as a lease liability (initially at the present value of the lease payment) in balance sheet. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis in the income statement. Classify all related cash payments as operating activities within the cash flows statement. Balance. Sheet. Income. Statement. Cash Flow Statement.
Not updated unless a remeasurement event takes place. To the extent more payments are shifted to variable lease payments, absent a remeasurement event, balance sheet right-of-use asset and lease liability would decrease. Shifting in lease arrangements as a result.