What are the differences?!
Both are capitalized leases, but: With sales type lease, you are leasing out equipment that you already own or built. Hence, if it were an outright sale (as it is in a capitalized lease anyway), your income statement would have revenue and cost of good sold. With a direct finance lease, you are leasing out someone else’s equipment. You’re acting purely as the finance arm (the bank) in the transaction. In that example, you would never have revenue and cost of good sold because there is no markup on the sale. The equipment was never on your balance sheet prior to the sale.
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so how does both leases affect FS? I am making my assumptions - Sales type: Income statment Sale - COGS = profit(say $200) + interest Expense - every priod CFO +$200 + interest expense CFI -$200(why??) Direct Finance: Balance shhet: Present value of leae pmts decreased each month by pmt?? Income statement + interest - every period CFI Differnece of least pmt - interest
when the present value of the lease payments are more than the fair value of the asset, it is accounted for as sale type lease in the books of lessor. irrespective of the fact how the lessee is accounting. in this case, difference between the present value of lease payments and fair value is immediately recognized as a income in the income statement of the lessor. lease payments are bifurcated between the interest and principal payment. interest is recognized in the income statement and depreciation on the asset is also provided for. in case of direct financing, lessor’s income statement is effected by only with the interest payments. no depreciation is provided for and no immediate profit is recognized
but why is asset depreciated in sales type lease - when the asset is already sold
Let me try to explain it another way. For this example, ignore implicit interest, since the receipt of interest is treated the same either way. Sales Type Lease: You’re an appliance store. You have a $25,000 restaurant stove that cost you $20,000 to purchase. Before the lease transaction, your inventory account is $20k. You lease the stove under a sales type lease, and the discounted PV of the lease payments is $25k. At the inception of the lease, you recognize revenue of $25k, COGS of $20k and GP of $5k. You book a capitalized lease obligation receivable of $25k, and as future payments are made, you allocate those payments to the receivable and to interest income. Direct Financing Lease: You’re a leasing company, you don’t own the stove, but a restaurant client wants you to help with the leasing arrangement. Before the lease, you have nothing on your books except cash. At inception, you take title to the stove and record the stove on your balance sheet at $25k. Cash is reduced by $25k as that was your outlay. Simultaneously, your restaurant client signs the paperwork with you and takes physical possession of the stove. You still have the title. You then move the $25k stove asset from one balance sheet account to another – stove inventory to capitalized lease obligation receivable. At this point, nothing has hit your income statement. Again, as payments come in, you allocate those payments to the receivable and to interest according to the amortization schedule.
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Only the lesee depreciates the asset. hkalra32 Wrote: ------------------------------------------------------- > but why is asset depreciated in sales type lease - > when the asset is already sold
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Thanks, that helped.