Question 15-19

Aleveraged leaseinvolves significant long-term, nonrecourse financing by a third-party creditor. The lessor serves the role of a mortgage broker and earns income by serving as an agent between a company needing to acquire property and a lender looking for an investment. The lender provides enough cash to the lessor to acquire the property. The leased property is then leased to the lessee under a capital lease with lease payments applied to the note held by the lender.

A lessee accounts for a leveraged lease the same way as a nonleveraged lease. A lessor records its investment (receivable) netof the nonrecourse debt and reports income from the lease only in those years when the receivable exceeds the liability.

Question 15-20

We can find authoritative guidance for accounting for leases under IFRS in “Leases,” International Accounting Standard No. 17, IASCF.

Question 15-21

Yes. A finance lease under IFRS might be classified as an operating lease under U.S. GAAP. U.S. GAAP has precise guidelines while IFRS are more “principles-based.” For instance, if the present value of minimum lease payments is 89% of the leased asset’s fair value, the lease would be classified as an operating under U.S. GAAP because lease payments are less than 90% of the asset’s fair value, but 89% might be a “major portion” of the asset’s fair value and the lease classified as a finance lease under IAS No. 17.

Answers to Questions (concluded)

Question 15-22

In general, IFRS is considered to be more principles-based while U.S. GAAP is more rules-based. For example, under IFRS one situation that normally indicates a finance lease is if the noncancelable lease term is for a major portion of the expected economic life of the asset. Another is if the present value of the minimum lease payments is equal to or greater than substantially all of the fair value of the asset. With regard to lease classification, U.S. GAAP provides more precise guidelines. The lines are brighter between a capital lease and an operating lease. Meeting any one of four criteria qualify a lease as a capital lease under U.S. GAAP. Also, the specification of what constitutes a “major portion” of the useful life of an asset is much more precise. We presume, quite arbitrarily, that 75% or more of the expected economic life of the asset is an appropriate threshold point for this purpose. Often, we might consider a “major portion” to be less than 75% and classify a lease as a finance lease under IFRS that would be an operating lease under U.S. GAAP. Similarly, what constitutes “substantially all” of the fair value of the leased asset also is more precise under U.S. GAAP. The lessee is considered to have in substance purchased the asset when the present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset at the inception of the lease. IFRS does not provide a specific percentage for determining what constitutes “substantially all” of the leased asset’s fair value. Also, IFRS provides (a) a fifth indicator of a finance lease that normally leads to a finance lease and (b) three indicators that might lead to a finance lease.