This treatment is unlike the calculation of the receivable on the lessor's books, which specifically excludes any guarantees by the lessee or bargain purchase options. Although this potential nonparallel treatment could make the lessee's liability greater than the lessor's receivable, the respective balances reflect the economic value to each party.
Under the R&R approach, assets are 1) the receivable calculated as the present value of the estimated lease payments--the minimum lease payment for the lessor does not include any guaranteed residual value when the lessee is not entitled to the residual profits on the residual and does not include any bargain purchase option, only the lessee's required lease payments are included--using the rate the lessor charges the lessee (generally, the implicit rate in the lease for equipment leases), and 2) the residual derived by subtracting the receivable from the book value of the underlying leased asset, plus any profit and deferred profit.
Possible cash payments from a guaranteed residual value or from a bargain purchase option will not be included in the minimum lease payment, and thus will not be included in the receivable because of the following:
* Bargain purchase option lease arrangements will likely be outside the scope of the new accounting rules and will be treated as a financing and purchase of the underlying asset.
Note: The Lessor does not include any residual value guarantees by the lessee or any bargain purchase option in the lease payments calculation.
There is much more to be discussed including financial statement reporting and disclosures, and we have not yet considered bargain purchase options
, residual value or sale-leaseback arrangements.
This month's column continues with an explanation of a capital lease that includes a bargain purchase option.
One of the four criteria which may define a capital lease is the presence of a bargain purchase option. This option allows the lessee to purchase the leased property at a bargain price, usually at the end of the lease term.
At the end of the lease, when the bargain purchase option is exercised, the entries made are shown in Table 3, A.
At the end of the lease, when the bargain purchase option is exercised, the lessor makes the entries shown in Table 4, B.
If at the end of the lease the lessee decides not to exercise the bargain purchase option, the lessor may also recognize a loss.